Claiming Tax Incentives for Your Clean Energy Project

Confirm that the clean energy project the municipality is building, or wants to build, qualifies for one of the IRA tax credits that are applicable for elective pay. The municipality will need to obtain and retain all necessary documentation to prove it has met the requirements for any tax credits and bonuses its wants to claim. Lawyers for Good Government (L4GG), a nonprofit organization that leverages pro bono attorneys to promote good government, developed a Documentation Checklist to help identify and retain documents needed to claim a tax credit and to help substantiate that a tax filer has met tax credit requirements in case of IRS audit.

In general, US Treasury and the IRS will not provide personalized tax advice on whether the municipality’s project or activity is eligible for a tax credit. These resources can help determine eligibility:

• The IRS Elective pay and transferability frequently asked questions webpage provides robust information to help the municipality qualify for and claim the credit.
• The Clean Energy Tax Navigator walks through the process of determining eligibility for Elective Pay. It is designed to be a free, public one-stop shop for tailored Elective Pay information.
• VLCT recommends municipalities consult with their auditors and a tax advisor.

Municipalities only can use elective pay after they have earn the tax credit. For Investment Tax Credits, the credit is earned during the tax year that the clean energy project is placed in service.

First time tax filers, like municipalities, declare their tax year as part of the tax credit claim process. Most municipalities will choose to use their fiscal year as their tax year, but that is not required. If the municipality declares its tax year as something other than its fiscal year, it will have other obligations, such as reconciling any difference between its regular books of account and its chosen taxable year” (IRS Elective pay and transferability frequently asked questions: Elective pay, Q23). The IRS has stated that there will be an opportunity to re-align tax year to the fiscal year in the future. As of January 2025, the IRS had not issued guidance on the realignment process.

For most governmental entities, the return for a taxable year is due 4.5 months after the end of that taxable year. See IRS Return due dates for exempt organizations - Form 990-T (corporations) to determine when the municipality’s filing is due.

Entities without a filing requirement, like municipalities, also can receive an automatic six-month extension of time to file Form 990-T by using Form 8868, Application for Extension of Time To File an Exempt Organization Return. An organization will only be allowed an extension of 6 months for a return for a tax year.

An authorized representative of the municipality must register the municipality with the IRS and receive a registration number for the project before the municipality can file a tax return and receive payment. The registration number is included in the municipality’s tax return as part of making the elective pay election. The applicable credit property should be placed in service prior to submitting a pre-filing registration.

The IRS uses an online portal for the pre-filing registration process. The IRS recommends filing for a pre-registration number at least 120 days (~4 months) before the due date of the municipality’s elective pay return.

First-time users of the portal will need to establish an account. The authorized representative must have or create an ID.me account. ID.me is a digital identity network that allows individuals to securely provide their identity online. Be sure to retain the pre-filing registration account access information as part of the municipality’s files, but do not retain the individual’s ID.me account information. The ID.me account belongs to the individual, not the municipality. If the portal allows the municipality to include two authorized representatives for the account, we encourage you to do this to retain access in case of personnel changes.

During the pre-registration filing process, the municipality will need to provide information about itself, the credits it wants to earn, and the eligible clean energy project. In general, each registration number corresponds to one clean energy property in one tax year. This means that if the municipality purchases an electric vehicle and installs an electric vehicle charging station in the same tax year, it must file for two registration numbers – one for each project. 

A registration number is only valid for the taxable year for which it is obtained. If the municipality files for a registration number in one tax year and its project is placed into service in the next tax year, it will need to renew the number. Receipt of a registration number does not guarantee that a project is eligible for a credit. It simply gives the IRS information it needs to process the credit when the municipality files for it.

Q32 through Q40 on the IRS Frequently Asked Questions webpage provides more information about pre-filing registration.

The municipality will need to provide its registration number and make the elective payment selection on its tax return. The tax return filing will include at least three forms: Form 990-T, Form 3800, and the form(s) for the credit(s) being claimed. Form 990-T is used by tax exempt entities to report unrelated business income and tax liabilities. The municipality files one Form 3800 and one Form 990-T regardless of the number of clean energy projects it completes.

The Lawyers for Good Government (L4GG) Elective Pay & IRA Tax Incentives webpage has resources to guide you through filing for the credit. This has become the go-to information source for local governments. Access is free. Some of the resources available include:

• Annotated tax forms – Learn which forms must be filed, what information goes where on the forms, and which sections of the forms need to be completed. Note: The IRS updates its forms annually. The annotated forms are 2023.
• Elective Pay FAQs – The FAQs are searchable. If you don’t find what you need, you can submit a question then watch for the answer on the FAQ page.
• Municipal Bond “Haircuts” – If your municipality used tax-exempt municipal bonds to finance its clean energy project, the value of the credit will be reduced because the municipality already has taken advantage of a tax exemption through the bond.

The value of your elective pay filing cannot exceed the eligible cost of your project, minus any grants and donations received.

Find more filing tips for tax-exempt organizations at Charities and nonprofits | Internal Revenue Service.

In general, payments occur after a return is successfully processed. Statutorily, organizations aren’t entitled to the elective payment until the due date of the return. Payments typically are issued within 45 days after that date. In some cases, payment may take less or more time. Payments are sent either electronically or via mail.

Entities that make an elective payment election could potentially be selected for an IRS audit. Be sure to retain all documentation as noted above.

Elective pay payments are a tax refund. As a refund, they are considered as local funds upon receipt and are not reported on the municipality’s Subrecipient Annual Report.