The Inflation Reduction Act of 2022 ("IRA") provides generous tax credits for certain clean energy investments (e.g., 50% of the applicable basis in wind and solar farm projects). However, Treasury's proposed regulations implementing the credits would effectively prevent ERISA funds and other tax-exempt entities from taking full advantage. Comments on the proposed regulations are due by August 14, 2023.
Although employee benefit plans and other exempt entities typically cannot take advantage of tax credits, Congress intended to give tax-exempt entities cash payments from the government for certain tax credits generated by their investments in green energy projects (the "Direct Pay" election). However, Treasury's proposed regulations make it difficult for tax-exempt entities to use Direct Pay because the proposed regulations fail to account for ERISA plan asset regulations and the Internal Revenue Code's unrelated business income tax ("UBIT"). Specifically, the proposed regulations essentially require direct ownership of the green energy project in order to receive Direct Pay tax credits, but ERISA funds generally must use indirect investment vehicles (e.g., Venture Capital Operating Companies or intermediate pooled investment vehicles) in order to avoid prohibited transaction and fiduciary burdens. Similarly, tax-exempt organizations generally own investments indirectly to avoid incurring UBIT (e.g., through corporations that act as UBIT blockers). The proposed regulations...
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