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Elective Pay

The Illinois Power Agency (IPA) is interested in ensuring that entities across Illinois leverage federal tax credits for their solar and other clean energy projects, including by using Elective Pay to reimburse up to 30% or more of project costs. To further that goal, the IPA will be conducting outreach and providing education and technical assistance on this new opportunity for tax-exempt entities. Starting in Fall 2025, IPA will host webinars for Elective Pay-eligible entities and Approved Vendors to provide detailed information on qualification, compliance, and filing. If you are an eligible entity or Approved Vendor interested in IPA’s resources on Elective Pay, please contact us.

House Resolution 1 (“H.R.1”), signed into law on July 4, 2025, introduces significant changes to clean energy tax credits made available under the Inflation Reduction Act, including those that can be claimed via Elective Pay (Find out more information on H.R.1 here).

It is still possible for Elective Pay-eligible entities to claim these tax credits for projects recently placed into service, and for projects still in the planning or construction phases.

Urgent deadlines may apply, including:

 

  • Deadline to file a tax return and claim the tax credit (or request a 6-month extension): 4.5 months following the end of an entity’s tax year in which they placed an eligible project into service

  • December 31, 2025: entities must ensure their projects have met “beginning of construction” milestones in order to avoid more onerous sourcing requirements that begin 1/1/26

  • July 4, 2026: solar projects beginning construction on 7/5/26 or later must be placed in service by 12/31/2027


IRS website: Frequently Asked Questions

 

Background

The Inflation Reduction Act of 2022 (Public Law 117-169) created a mechanism called Elective Pay (sometimes referred to as “direct pay”), which enables tax-exempt entities to claim federal tax credits for their investments in renewable energy and clean energy projects. 

Tax-exempt entities such as municipal governments, public school districts, nonprofits, rural electric-cooperatives, and faith-based organizations can now, for the first time, get reimbursed for a portion of their project costs by submitting a federal tax return and claiming these credits. Claiming these credits for eligible projects is treated as an overpayment of taxes resulting in entities receiving a check from the Internal Revenue Service (IRS) for the credit amount.

Twelve federal tax credits can be claimed via Elective Pay, and these credits determine the types of technologies and projects that can make use of the credits. Some examples include:

 

  • Solar projects

  • Geothermal HVAC systems

  • Battery energy storage systems

     

State of Illinois Resources

Elective Pay enables these entities to claim the commercial clean energy tax credits, which can be paired with the Illinois Shines and Illinois Solar for All program incentives, net metering credits, and smart inverter rebates, all of which are outlined in this IPA Fact Sheet: Credits and Rebates for Installing Solar.

Entities that need financing for up-front project costs may be eligible for Illinois Climate Bank’s solar bridge loans. These bridge loans provide short-term financing to cover the period between funding a solar project and receiving federal tax credits (including Elective Pay), renewable energy credits (RECs), or other financial incentives. These loans help ensure that solar providers and customers can move forward with projects without waiting for tax credits, U.S. Treasury payments, Illinois Solar for All incentives, Illinois Shines incentives, or utility payments.

IPA Educational Webinars

Eligible tax-exempt entities are invited to register for IPA webinars on Elective Pay. Municipalities, public school districts, nonprofits, and other tax-exempt organizations that have placed a clean energy project in service in the approximately the last year, or will soon do so, are encouraged to attend.


IPA Elective Pay Webinars

Elective Pay Webinar 12/03/25 Q&A

Will a recording of the webinar be available?

IPA will publish the recording on the Elective Pay webpage on the IPA website: https://ipa.illinois.gov/renewable-resources/hr1/elective-pay.html

Will the slides be available after the presentation?

IPA will publish a final version of the slides with clickable links on the IPA website. 

Because RECs are a production-based incentive, would they count toward the “no excess benefit” rule?

The rule being discussed during this part of the webinar is the “no excess benefit” rule (described in the IRS’s final regulations on Elective Pay, 89 FR 17546, found here). This rule does not allow the combination of restricted tax exempt funds PLUS the tax credit being claimed to exceed the project’s total eligible costs. If the entity receives “tax exempt amounts” for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property (e.g., solar panels), and these restricted tax exempt amounts plus the applicable tax credit exceeds the total eligible project costs, then the amount of the tax credit is reduced.

The “no excess benefit” rule is particularly focused on restricted grant funds and forgivable loans. The law refers to “amounts that are exempt from taxation under subtitle A or otherwise excluded from taxation (such as income from certain grants and forgivable loans).” Moreover, given that the rule targets funds used for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring an investment-related credit property (e.g., solar panels), it does not appear that Renewable Energy Credits (RECs) are intended to fall under this rule, but we strongly advise that you consult with your tax professional on any specific cases.

For the requirements related to start of construction, is the size on a per project or per entity basis? For example, a city has multiple buildings (at different addresses) where solar projects are proposed.

It depends on the purpose for which you are determining the “start of construction.” The One Big Beautiful Bill Act (OBBBA) phases out a number of tax credits on an accelerated timeframe. This is the case for wind and solar projects claiming the Investment Tax Credit, for example. Wind and solar projects that begin construction after July 4, 2026 must be placed in service by December 31, 2027. The IRS has issued regulations (Notice 2025-42) defining “beginning of construction” for the purpose of determining if wind and solar projects need to accelerate their project timelines before the credits expire. To meet the definition of “start of construction” for this purpose:

●        Low output solar facilities (< 1.5MW AC) can “start construction” by paying or incurring 5%+ of total final eligible project costs, while

●        All other projects (> 1.5MW AC solar projects and all wind projects) must begin physical work of a substantial nature at the project site.

These rules use the 1.5 megawatt demarcation based on the output of a facility (maximum net output as measured in alternating current). Under these regulations, there are certain conditions under which multiple projects can be considered a single “facility.” The regulations note that facilities with “integrated operations” will be aggregated for purposes of the 1.5 MW determination. Solar facilities will be treated as “integrated” if the facilities are (a) owned by the same or related taxpayers; (b) placed in service in the same taxable year; and (c) connected to the grid at the same point of interconnection or, in the case of a behind-the-meter project, share the same end-user. All three of these conditions must be met in order to be considered a single “facility.”

For all other purposes (e.g., determining if a project has started construction prior to January 1, 2026 in order to avoid application of the Prohibited Foreign Entity material assistance rules), the existing guidance about the start of construction (found in IRS Notices 2013-29 and 2018-59) continue to apply, and those rules include separate guidance on defining a “single project.”

Are there resources that a CPA can look at to give them more information and to assure them that this is legitimate? That they are allowed to file with the IRS?

Please feel free to share the information on IPA’s website about Elective Pay (found here). Sharing the IRS’s Frequently Asked Questions on Elective Pay may also be of help. 

Is there any information on public/private partnerships? Could a private partner receive a cut of the elective pay the public partner gains?

There are specific rules around partnerships involving Elective Pay eligible entities. Please see the relevant IRS regulations: 89 FR 91552. This topic is also covered in the IRS FAQ on Elective Pay. 

What are the labor requirements for Elective Pay?

You can find more information on the Prevailing Wage & Apprenticeship (PWA) requirements that apply to a number of the tax credits that can be claimed via Elective Pay on the IRS’s website here. The IRS also has an FAQ page about the PWA requirements.       

What is the IRS elective pay email address, phone number, and office times?

Please see  https://www.irs.gov/credits-deductions/register-for-elective-payment-or-transfer-of-credits for office hour registration information (scroll down to the section titled Office Hours). Send email questions to irs.elective.payment.or.transfer.of.credit@irs.gov, and the best phone number to call is the phone number listed on the IRS’s website as being specific to nonprofit taxes: 877-829-5500 (8 a.m. to 5 p.m. local time).