What is Elective Pay & Can I Utilize Elective Pay for a Geothermal Project?

Elective pay, also known as direct pay, is a program that allows entities to receive a tax-free cash payment if they meet the requirements for elective pay and the underlying Inflation Reduction Act (IRA) tax credit. In simpler terms, for individuals wanting to take advantage of the tax credit for geothermal or other qualified renewable energy projects, if they don’t qualify for elective pay, their credit goes toward what they owe on their annual tax return. With elective pay, qualifying entities will instead receive credit in cash so they can continue their positive societal impact. This is a significant development for the ground source heat pump (geothermal) industry and organizations interested in utilizing elective/direct pay.

Who is eligible for IRA Elective Pay? 

Elective pay is available to the following groups and organizations: 

• Tax Exempt Organizations 
• Non-profits 
• Churches 
• Schools 
• Rural Electric Cooperatives 
• Tribal and Native Entities 
• States, Territories, Public Power 

More than 900 rural electric co-ops, which provide power to 32 million Americans, can now benefit from these elective payments, and schools all over the U.S. are beginning to take advantage of the elective pay option.  

How to Claim IRA Elective Pay 

We highly recommend first speaking to a tax professional about your project and keeping them informed throughout the process.

Process and Elective Pay Pre-filing

1. Identify and pursue the qualifying project. 
2. Determine your tax year if you do not already know it.  
3. Complete the pre-filing registration with the IRS.  
   - Keep in mind your tax filing deadline affects when you need to complete your pre-filing registration. 
   - Complete pre-filing registration after you place a product into service and at least 120 days before your tax filing deadline to ensure the IRS has enough time to process the registration before filing your tax return. 
   - The pre-filing registration portal is now available as of 12/22/23.  
   - This is required to utilize elective pay. The applicant will receive a registration number that must be included on their annual return, so keep this registration number.  
4. Satisfy all eligibility requirements for the tax credit. 
5. File the annual tax return by the due date and make a valid elective payment election. 
   - A late election will not be allowed.  You will miss out on the credit if you try to make the election late. It’s also important to know that the election can only be done on the first return, not an amended one. 

The elective payment portal is now open on irs.gov. 

Keep in mind that elective pay payments will not be made before May 15, no matter when the tax return is submitted.  

Elective Pay is a Great Thing for the Geothermal Industry 

Tax credits, rebates, and elective pay are now more critical than ever for those looking into geothermal heat pumps. The US Department of Energy (DOE) highlights geothermal heat pumps as a pathway to a decarbonized energy future. They report that geothermal heat pumps are a grid-cost reduction tool that, when deployed nationally, substantially reduces CO2 emissions and that large-scale geothermal heat pump deployment could eliminate more than seven gigatons of carbon.   

The DOE also reports that geothermal deployed at a mass scale would be equivalent to:  

• 12% cheaper wholesale electricity  
• 7.34 gigatons C02e saved  
• 33% fewer miles of transmission  
• 47% cheaper grid decarbonization  
• 19 billion/year fuel cost savings    

This adds up to cumulative savings of more than $1 trillion!   

Geothermal is the future, and thanks to resources like elective pay, tax credits, rebates, and grants, more people are getting in on ground source heat pumps. Have any questions? No matter where you’re at in your geothermal journey, we’re here to answer your questions and get you connected. We’d be happy to chat!

Sources  

 Cranor, Taylor, Dennis, Keith, Dougherty, Fitzmorris, Doug, Ryan, Kaercher, Mike, McCleery Rachel, “BEL Webinar - Direct Pay -1/4/2023.”   

“U.S. Department of Energy Analysis Highlights Geothermal Heat Pumps as a Pathway to a Decarbonized Energy Future.” Energy.Gov, 6 Dec. 2023, www.energy.gov/eere/articles/us-department-energy-analysis-highlights-geothermal-heat-pumps-pathway-decarbonized.