Image art by Paul Gerke via Gemini.
Friday, May 15, marks a meaningful deadline for energy projects using the U.S. Internal Revenue Service’s (IRS’s) elective pay provision. It’s the last day to file Form 990-T for calendar-year tax-exempt entities, which is the return on which they would claim elective pay for projects placed in service in 2025.
Elective pay, or direct pay, is used by entities like municipalities and schools to monetize clean energy tax credits with cash from the IRA rather than using the credits to offset tax liability. Many are navigating tax credit structures for the first time, creating both opportunity and friction as timelines tighten.
Bryen Alperin, managing director at the tax credit specialist firm Foss & Company, connected with Factor This to offer ground-level view of how deals are being structured under time pressure, where projects are hitting roadblocks, and what this surge suggests about longer-term adoption of direct pay.
Paul: Let’s start with the basics. What is elective pay, and how does it work? What are its advantages and disadvantages?
Bryen: Elective pay (or “direct pay”) was created by the Inflation Reduction Act (IRA) under Section 6417. It lets certain entities monetize clean energy tax credits by receiving a cash payment from the IRS instead of using the credit to offset tax liability. That matters because most of the entities driving the public-interest side of the energy transition, including state and local governments, tribes, rural electric cooperatives, public utilities, U.S. territories, and 501(c) nonprofits, don’t have federal tax liability to begin with. For-profit entities can also use direct pay, but only for three credits: 45V (clean hydrogen), 45Q (carbon capture), and 45X (advanced manufacturing).
Mechanically, the entity completes a pre-filing registration with the IRS, receives a registration number, and then claims the credit as a payment on its tax return. The advantage is that it opens a path to monetize credits without bringing in a traditional tax equity investor or tax credit buyer. The disadvantages are time, cost, and inefficiency. Registration is paperwork-heavy. Cash receipt typically lags the placed-in-service date by 24 months or more. There’s a real risk of adjustment from the IRS. And in many cases, the underlying tax benefits aren’t fully monetized. Direct pay covers the credit itself but not depreciation, so for something like carbon capture equipment, the depreciation benefits can be stranded if the sponsor has no tax appetite to use them.
Paul: Why is direct pay so important to project economics right now?
Bryen: Direct pay is a useful tool for government entities and nonprofits that may not have the sophistication or scale to access traditional tax equity markets. Candidly, though, it’s not broadly used today. We saw a number of developers try it in the wake of the IRA, and many of them regretted it because of how long it took to get paid by the IRS.
The trade-off is fairly stark. Selling credits to a traditional buyer might get a developer $0.90 to $0.92 on the dollar, but they get paid upfront. Direct pay pays the full dollar, but the cash can be 24 months or more out. For most developers, that time-value math doesn’t pencil.
Paul: How has evolving tax policy under the OBBB complicated projects? Have you noticed a slowdown in pipelines as stakeholders adjust?
Bryen: We did see a slowdown in 2025, but the driver was different from what people might assume. It wasn’t primarily about changes to the credits themselves. It was about the One Beautiful Bill’s (OBBB’s) corporate tax cuts, which significantly reduced taxable income for many of the corporations that would have been the natural buyers of tax credits last year. Some of our investors who would otherwise have been in the market for hundreds of millions of dollars of credits effectively stepped out because their tax liability had been reduced to near zero by the bill.
The market is normalizing in 2026, but the new tax credit supply still appears to be outpacing investor demand. That’s putting downward pressure on prices, which is actually creating an opportunity for the buyers who remain in the market to acquire credits at meaningful discounts.
Paul: Where does direct pay go from here? What’s the future application of the provision?
Bryen: I’d expect direct pay to continue as a tool for municipalities, nonprofits, and similar entities. It serves a useful purpose, and it takes some pressure off the traditional tax credit market. That said, direct pay can be politically controversial because it involves the IRS issuing large cash refunds rather than offsetting tax liability. I wouldn’t be surprised to see it scaled back at some point, especially if any meaningful abuse surfaces. The Section 1603 cash grant program under the Obama administration was a structurally similar tool, and it was ultimately ended.
Part of what makes traditional tax credits such an efficient policy instrument in the U.S. is the public-private partnership built into them. A private taxpayer has its own capital at risk, so it diligently examines the underlying project and carefully polices which deals get funded. Direct pay loses that dynamic. It’s purely public, with no private partner to ensure that only the most viable and deserving projects clear the bar.
Ref: https://www.renewableenergyworld.com/energy-business/policy-and-regulation/elective-pay-explained-as-key-irs-deadline-approaches-qa-with-tax-credit-specialist-bryen-alperin/
