Direct Pay Under the IRA: Monetizing Credits Without Tax Liability
For decades, tax-exempt organizations, municipalities, and tribal nations were locked out of clean energy tax credits — they simply had no tax liability to offset. Section 6417 of the IRA changed everything. Direct pay turns credits into cash refunds from the IRS, no tax bill required.
What Is Direct Pay?
Section 6417 created the concept of an "elective payment election." Rather than using a tax credit to reduce a tax liability, an eligible entity can elect to treat the credit as an overpayment of tax — which the IRS then refunds in cash, exactly like a tax refund. The entity receives 100 cents on the dollar of the applicable credit amount (subject to the domestic content adjustment discussed below).
This was a transformative change for the clean energy landscape. Prior to the IRA, a nonprofit building a solar array on its community center had two options: pursue a costly tax equity partnership (if the project was large enough to attract a tax equity investor) or leave the credits uncaptured. Now, the nonprofit can simply receive the ITC as a check from the Treasury.
Who Can Elect Direct Pay
Direct pay eligibility has two tiers:
Tier 1: All Eligible Credits (Unlimited Years)
- + 501(c) tax-exempt organizations (nonprofits, hospitals, universities, churches)
- + State, territorial, and local governments and their instrumentalities
- + Indian tribal governments and Alaska Native Corporations
- + Rural electric cooperatives (Section 501(c)(12))
- + Tennessee Valley Authority
Tier 2: 45Q, 45V and 45X Credits Only (First 5 Years)
- + ANY taxpayer (including for-profit C-corps, LLCs, partnerships) may elect direct pay for 45Q (carbon capture), 45V (clean hydrogen) or 45X (advanced manufacturing) credits for the first 5 taxable years those credits are earned
- + This is specifically designed to support early-stage development of carbon capture, hydrogen and clean energy manufacturing
Eligible Credits
The following credits are eligible for direct pay election under Section 6417:
| Credit | Description | Direct Pay Eligible |
|---|---|---|
| §48E ITC (legacy §48) | Investment tax credit for clean electricity and energy storage property | Yes (Tier 1 entities) |
| §45Y PTC (legacy §45) | Production tax credit for clean electricity | Yes (Tier 1 entities) |
| §45Q | Carbon oxide sequestration credit | Yes (Tiers 1 & 2) |
| §45V | Clean hydrogen production credit | Yes (Tiers 1 & 2) |
| §45X | Advanced manufacturing production credit | Yes (Tiers 1 & 2) |
| §48C | Advanced energy project credit | Yes (Tier 1 entities) |
| §179D | Energy efficient commercial building deduction (ended for construction beginning after June 30, 2026) | No (deduction, not credit) |
| LIHTC (§42) | Low-income housing tax credit | No (not listed in §6417) |
The legacy §48 and §45 apply only to projects that began construction before 2025; newer projects use §48E and §45Y. Under the One Big Beautiful Bill Act (P.L. 119-21), wind and solar projects qualify only if construction began by July 4, 2026, or the facility is placed in service by December 31, 2027. Energy storage keeps a longer phase-down schedule, and foreign-entity-of-concern restrictions now apply.
The Domestic Content Penalty
Direct pay electing entities face a significant caveat: for a facility of 1 MW or more that does not satisfy domestic content requirements, the elective payment is reduced on a schedule set by the year construction began:
- Construction began before 2024: full payment
- Construction began in 2024: 90% of the credit
- Construction began in 2025: 85% of the credit
- Construction began after December 31, 2025: no payment, unless the IRS grants an exception for cost or availability
Facilities under 1 MW, and facilities that meet the requirement, receive the full amount (IRC §45Y(g)(12), applied to §48E by §48E(d)(5)). This reduction does not apply to taxable entities using transferability (Section 6418). For a new project of 1 MW or more, an organization that cannot document domestic content should expect no elective payment and plan the project on that basis.
Direct Pay vs. Transferability: Quick Comparison
| Factor | Direct Pay (§6417) | Transferability (§6418) |
|---|---|---|
| Who can use it | Tax-exempt orgs, govts, tribal + all for 45Q/45V/45X | Taxable entities that generated the credit |
| Cash received | 100¢ per $1 (subject to domestic content phase-down) | 88-96¢ per $1 (market pricing) |
| Buyer required | No — IRS pays directly | Yes — must find a buyer |
| Tax return required | Yes — must file even if non-filer | Yes — seller must file to elect |
| Timing | Annual tax return cycle (could be 6-18 months) | 4-8 weeks post-transaction signing |
| Domestic content impact | Payment phased down for 1 MW+ facilities; zero for construction beginning after 2025 | No reduction |
Real-World Examples
Example 1: City Solar Array
A municipality installs a 500kW solar array on its public works building at a cost of $1.2M. The ITC is 30% = $360,000. At 500 kW the array is under the 1 MW threshold, so the domestic content rules do not reduce its elective payment. The city files a Form 3800 election on its annual return and receives a $360,000 refund from the IRS, effectively reducing the net project cost to $840,000, a 30% savings. As a solar project, it qualifies only if construction began by July 4, 2026, or the array is placed in service by December 31, 2027.
Example 2: Hospital Battery Storage
A nonprofit hospital installs a 2MW battery energy storage system at a cost of $4M, with construction beginning in 2026. Storage qualifies for the §48E ITC at 30% = $1.2M when prevailing wage and apprenticeship requirements are met, which the hospital does through a union construction agreement. Because the system is 2MW and construction began after 2025, the hospital must also satisfy the domestic content requirement, or its elective payment would be zero, and it must meet the foreign-entity-of-concern restrictions. With both in place, the hospital receives $1.2M from the IRS, reducing its net capital cost to $2.8M without needing a tax equity investor.
Frequently Asked Questions
What is Section 6417 direct pay?
Section 6417 of the Internal Revenue Code, enacted by the IRA, allows eligible entities to elect to treat certain tax credits as "elective payments" — meaning the IRS pays out the credit amount as a direct cash payment, just like a tax refund, even if the entity has no federal tax liability. This allows tax-exempt organizations, governments, and tribal nations to benefit from clean energy credits for the first time.
Who can elect direct pay?
The following entities can elect direct pay for ALL eligible credits: (1) Tax-exempt organizations described in Section 501(c) (nonprofits, churches, charitable organizations); (2) State, territorial, and local governments (and their instrumentalities); (3) Indian tribal governments; (4) Alaska Native Corporations; (5) Tennessee Valley Authority; (6) Rural electric cooperatives (Section 501(c)(12)). Additionally, ANY taxpayer (including for-profit entities) can elect direct pay for 45Q (carbon capture), 45V (clean hydrogen) and 45X (advanced manufacturing) credits during the first 5 years the credit is earned.
What is the domestic content penalty for direct pay?
For a facility of 1 MW or more, an entity electing direct pay must satisfy the domestic content requirements (US steel, iron, and manufactured products) or the payment is reduced according to when construction began: 90% of the credit for construction beginning in 2024, 85% for 2025, and nothing for construction beginning after December 31, 2025, unless the IRS grants an exception for cost or availability. Facilities under 1 MW, and facilities that meet the requirement, receive the full amount (IRC §45Y(g)(12), applied to §48E by §48E(d)(5)).
How does a direct pay election differ from transferability?
Direct pay (Section 6417) means the entity receives cash directly from the IRS, with no buyer needed. Transferability (Section 6418) means a taxable entity sells the credit to a third-party buyer for cash at a market discount (typically 88-96 cents per dollar). Tax-exempt and governmental entities cannot transfer credits, so direct pay is their route to the credit value: 100 cents on the dollar, subject to the domestic content phase-down where it applies. However, direct pay requires filing a tax return (even for non-filers) and waiting for the IRS refund cycle.
How do I make a direct pay election?
To elect direct pay, the eligible entity must: (1) File an annual tax return (Form 990-T for most tax-exempt organizations and governmental entities; Treasury guidance identifies the applicable return); (2) Complete Form 3800 (General Business Credit) and the applicable credit form (e.g., Form 3468 for ITC); (3) Make the elective payment election on the return; (4) Obtain a unique registration number from the IRS's online portal (registration opens each year prior to the filing deadline). The IRS issues the direct payment as a refund, typically within the normal refund processing timeframe.
Check your direct pay eligibility with IncentEdge
Use the IncentEdge direct pay checker to see whether your organization and project qualify for elective pay, and what the credit could be worth.
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