Elective Pay

The U.S. Department of Energy’s map, which can be accessed here, only includes 2023 and 2024 designated energy communities. Third party tools, such as the map produced by Baker Tilly, a private accounting firm, are more up-to-date. The Baker Tilly map has been updated to show energy communities for projects constructed from June 2025 onwards.

The IRS has issued multiple notices on the Energy Communities Bonus Credit. Census tracts can qualify as Energy Communities based on a two different considerations:

1. The IRS guidance lists eligible census tracts that qualify based on having coal closures in the area. Any census tract that is listed in any of the coal closure appendices is eligible. This includes IRS Notice 2023-47 Appendix 3, IRS Notice 2024-48 Appendix 2, and IRS Notice 2025-31 Appendix 4.
2. Other communities are eligible based on employment rates in the fossil fuel industry and unemployment rates of the metropolitan and non-metropolitan statistical areas (MSAs and Non-MSAs). These qualifying areas change as the underlying rates change. A project can qualify as an Energy Community either on the date that it begins construction or the date it is placed in service. Projects placed in service after June 2025 can look to Appendix 3 of IRS Notice 2025-31 to determine eligibility.

Brownfield locations can also claim the Energy Communities Bonus Credit and are not located on any maps.

Per the tax code, an Elective Pay election must be made on an original tax return filed by the original filing deadline for the taxable year in which the project was placed in service or, if a six-month extension has been requested, by the extended filing deadline. The due date for the original return is four and a half months after the end of an entity’s tax year. Filing deadlines can be found on the IRS website here. As shown on the IRS website, entities can request a six-month extension to file their return, but this extension must be requested by the original filing deadline.

Note: Entities that have filed a tax return or a Form 990 have established a tax year with the IRS. Entities that have never filed a return or Form 990 with the IRS can choose to file their return based on their organization’s fiscal year or the calendar year.

Entities cannot make an elective payment election for the first time on an amended return. (However, a numerical error can be corrected on an amended return.) Moreover, the eligible entity must contain all of the required information, including a registration number, on its original return. Entities that do not file a return in time for their original (or, if requested, extended) deadline have forfeited the ability to claim the tax credits via Elective Pay.

Projects financed using tax-exempt bonds that claim the Investment Tax Credit or Production Tax Credit receive a reduced tax credit, based on the amount of the project that is financed with tax-exempt bonds. Determining the exact amount of the reduction requires an entity to first determine the value of the tax credit, and IPA strongly recommends doing so under the advice of a CPA. Once that amount is determined, the amount of the reduction is equal to the amount of the project financed using tax-exempt bonds, with the maximum reduction being fifteen percent of the value of the credit.

IPA recommends reviewing Lawyers for Good Government’s Guidance Brief on Municipal Bond “Haircuts” here: https://l4gg.docsend.com/view/uhgdatfaa28wfgji

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

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

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.

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 issued regulations in August 2025 (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) technically apply, and those rules include separate guidance on defining a “single project.” We caution, however, that forthcoming IRS guidance on the Prohibited Foreign Entity rules may not maintain the 2013/2018 “beginning of construction” definition, nor the more restrictive one from the August 2025 regulations outlined above. Many are using the August 2025 guidance as a reference point, given it is more stringent, while understanding the risk of a new definition is possible in any new regulations.

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. 

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. 

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.       

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).

As outlined in various IRS regulations, the physical work test is based on the facts and circumstances of a specific project. IRS Notice 2025-42 (which defines “beginning of construction for the purpose of determining if wind and solar projects need to accelerate their project timelines before the credits expire) notes that “The Physical Work Test requires that physical work of a significant nature be performed. This test focuses on the nature of the work performed, not the amount or the cost.” As such, there is no quantitative measurement or clear minimum requirements one can look to to determine “beginning of construction” in these cases. 

This IRS guidance does note that “off-site physical work of a significant nature may include the manufacture of components, mounting equipment, support structures such as racks and rails, inverters, and transformers and other power conditioning equipment” and, for solar facilities, “On-site physical work of a significant nature may include the installation of racks or other structures to affix photovoltaic (PV) panels, collectors, or solar cells to a site.”

The IRS notes that “Physical work of a significant nature does not include preliminary activities,” such as (a) planning or designing; (b) securing financing; (c) exploring; (d) researching; (e) conducting mapping and modeling to assess a resource; (f) obtaining permits and licenses; (g) conducting geophysical, gravity, magnetic, seismic and resistivity surveys; (h) conducting environmental and engineering studies; (i) clearing a site; (j) conducting test drilling to determine soil condition (including to test the strength of a foundation); (k) excavating to change the contour of the land (as distinguished from excavation for a foundation); and (l) removing existing foundations, turbines, and towers, solar panels, or any components that will no longer be part of the applicable wind or solar facility (including those on or attached to building structures).

The appropriate IRS forms an entity needs to file with its tax return depend on the type(s) of project(s) for which it hopes to claim tax credits. The IPA encourages entities to work with a qualified tax professional to determine which forms must be completed for their specific circumstances. However, in general, all eligible entities will need to at least complete a Form 990-T. Entities can find more information, and annotated versions of previous years’ tax forms, on the Lawyers for Good Government website: https://www.lawyersforgoodgovernment.org/annotated-tax-forms. The latest versions of IRS forms can be found on the IRS website: https://www.irs.gov/forms-instructions-and-publications?items_per_page=25&find=&order=posted_date&sort=desc.