While the Inflation Reduction Act (IRA) has ushered in a new era of tax incentives, many entities may not be able to benefit fully from the incentives due to their tax-exempt status or lack of taxable income. For such entities, the IRA offers an alternative option: electing to receive a direct payment (also known as elective payment) from the IRS, instead of claiming the tax credit. This option can provide a valuable source of cash flow and financing for these entities, but it also comes with complex rules and procedures that need to be followed carefully.  In this article, we will explore the final regulations issued by the IRS under section 6417 of the Internal Revenue Code, which govern the elective payment mechanism for applicable credits. We will focus on two important aspects of these regulations that affect tax-exempt organizations and grant recipients. Finally, we will provide practical guidance on how to comply with the requirements and maximize the benefits of the elective payment option. Non-filing entities tax year For tax-exempt entities that have not traditionally been required to file a return, the IRS has specified procedures to accommodate their situations. These entities can now make elective payment elections for clean energy projects. Specifically, if these entities undertake eligible projects, they may have to undergo a pre-filing registration process, despite their lack of a historical filing requirement.  Reg.  §1.6417-2(b)(3) provides that such entities may determine their taxable year for filing Form 990-T based on either a calendar year or a fiscal year [1], thus offering flexibility and acknowledging the varied nature of tax-exempt organizations. The entities must maintain adequate books and records to support their chosen taxable year for making an elective payment election. The rule offers resolution for fiscal year taxpayers who placed in service credit-eligible property in early 2023 without needing to go through a complex and likely missed opportunity to change a tax year under the IRC section 441 procedure. Grants and forgivable loans The final IRA regulations provide guidance on the treatment of grants and restricted donations for clean energy projects. Tax-exempt amounts, including income from grants and forgivable loans used to acquire eligible clean energy projects, are included in the basis for computing the applicable credit amount. However, a "no excess benefit" rule reduces the credit if the sum of restricted tax-exempt amounts and the credit exceeds the property's cost. The rule applies to all restricted tax-exempt amounts, including federal and non-federal grants, to prevent entities from receiving inflated credit amounts. The regulations also address "recoverable grants," which may not be considered restricted tax-exempt amounts if repayment is only required when there's an excess benefit. The determination of whether a tax-exempt grant is considered a restricted tax-exempt amount is made when the grant is awarded. Grants awarded after investment-related property has been purchased are not considered restricted tax-exempt amounts. Restricted tax-exempt amounts are specifically aimed for the purchase, construction, reconstruction or acquisition of investment-related credit property. However, grants awarded post-acquisition can be deemed restricted if the grant approval was merely a formality and the grant amount was almost guaranteed at the time of application. Unrestricted gifts or general funds are addressed in section 1.6417-2(c)(3)(ii). The regulation specifies that the "no excess benefit" rule is inapplicable if the tax-exempt amount is not allocated “for the specific purpose of purchasing, constructing, reconstructing, erecting, or otherwise acquiring property eligible for an investment-related credit.” Finally, the pre-registration process mandates the disclosure of funding sources.  Final thoughts  The final regulations of section 6417 mark a crucial update for tax-exempt organizations, grant recipients and other entities aiming to leverage the full potential benefits of the IRA. While the final guidelines are new and intricate, they provide unique opportunities for alternative financing, especially for those managing grants. To successfully navigate these complexities, begin by   consulting with one of our tax specialists.
References  Elective Payment of Applicable Credits; Elective Payment of Advanced Manufacturing Investment Credit; Final Rules; Election To Exclude Certain Unincorporated Organizations Owned by Applicable Entities From Application of the Rules on Partners and Partnerships; Proposed Rule, Federal Register, 2024

Explore how tax-exempt organizations can navigate section 6417 of the Inflation Reduction Act to maximize their benefits. The elective payment mechanism for applicable credits can affect the taxable year for non-filing entities and the treatment of grants and forgivable loans for clean energy projects.

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Value-Added Tax

Tax-exempt organizations have a new cash flow opportunity

Since value added taxes (VAT) are always changing and authorities are requesting more and more information to be provided in a shorter timeframe, one of the most popular topics nowadays is tax technology. Companies are automating their systems in many ways to meet all these requirements. One of the solutions companies are considering is the implementation of a tax engine for VAT determination. In this article, we provide you with a brief glance on how a tax engine for VAT works and some factors to keep in mind when considering a tax engine solution.     Tax engine  A tax engine is a piece of software containing VAT rules, VAT rates and VAT logic per jurisdiction which is connected/integrated to the Enterprise Resource Planning (ERP) system of a company. The tax engine is used to determine the correct VAT treatment and calculate the correct VAT rate and amount. It will overrule the native VAT functionality of the ERP.   The way it works  Data like taxpayer and location information and taxability drivers (e.g., type of goods/services, ship from, ship to, invoice amount, etc.) allows the tax engine to determine the applicable VAT treatment. This information needs to be provided to the tax engine as the tax engine does not contain any company-related transaction information. This information will be derived from a company’s ERP. Specific information needed to generate a VAT result will be connected and mapped between the ERP and the tax engine. Based on this information the tax engine will determine the applicable jurisdiction and VAT treatment, followed by a calculation of the VAT rate and VAT amount. The result will be sent back to the ERP to be processed and used, for example, on invoices to be issued.   Tax engine or not?  Without a tax engine the in-house tax team of the company is responsible for the VAT position of the company. The team needs to monitor the VAT legislation, as well as changes and rates of the company on a local and global level. Being in control of the VAT position is a “manual” and labor-intensive process. Implementing a tax engine will improve the VAT compliance process of the company. A VAT-related tax engine:  Contains and maintains the latest VAT legislation and VAT rates per region and will be updated automatically;  Ensures that the company can quickly react to VAT changes resulting in risk reduction;  Provides the VAT calculation per transaction in real time;  Automates and centralizes VAT calculations across the business of the company; and   Reduces costs and human errors due to less human intervention.  A tax engine is a substantial investment for every company. In this rapidly changing VAT environment, however, being in control of your VAT position all the time is crucial. Therefore, a tax engine could be the perfect solution for your business, making your business’ VAT compliance process more efficient, agile and scalable.   Baker Tilly is here to discuss the available options and solutions to improve the VAT compliance process of your company. If you’d like to learn more or if you have any further questions, please contact our team.  
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Read our article to learn how a value added tax (VAT) engine works and what to keep in mind when considering a tax engine solution.

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An introduction to tax engines in the world of VAT

Stay in control of your indirect tax compliance.

Selling goods and services overseas can require the charging, filing and remitting of consumption taxes called value-added taxes (VAT) or general services taxes (GST). Imposed in over 150 countries, VAT impacts many U.S. businesses that handle multinational transactions overseas. 

Sellers must manage a country-by-country variance in B2B, B2C and D2C applicability with dependence on many factors including sales thresholds, reverse-charge mechanisms, exemptions and residency. 

As tax authorities consistently introduce updated reporting rules, organizations must work harder to stay compliant with the new changes. 

Our team maneuvers through global transactions seamlessly and provides solutions-driven results to ensure your business stays compliant — giving you more time to reach your full potential and map out goals for the future.

Let the Baker Tilly global network assist with the multifaceted requirements, while having a local representative manage the compliance.

Discover a new way to manage the sale of goods and services while optimizing your organization’s profits.

Baker Tilly’s globally integrated team provides support to manage VAT effectively. With a new perspective and customized assistance, we’ll enhance your reporting, which will lead to reduced errors and costs for your business overall. 

Baker Tilly has experience working with VAT in countries around the world and with companies in a variety of industries and services. We can manage your international go-to market strategic solutions with a team that specializes in VAT and GST for foreign advice when needed. 

Our service offerings include international VAT and GST registrations, filings and compliance. From VAT consulting to VAT advocacy, we’ll work with you every step of the way to help you better understand the complexity of VAT and indirect taxes and focus in on where you can become more VAT-efficient — so you can avoid major risks and continue driving your global business through new terrain.

We can help you determine whether your U.S.-based company is required to register, collect, remit and file for VAT, for the import of goods, services or the transfer of digital services. Together, we can look at VAT deferment eligibility and reverse charge applicability.

We look at historical sales and prospective sales to determine the best strategy to minimize the overall liability.

Our team takes the burden of managing different filing deadlines, record keeping and new tax legislation so you don’t have to.

Stay compliant with the ever-changing VAT regulations

Baker Tilly’s value-added tax (VAT) team supports clients with the multifaceted global requirements and helps manage the compliance.

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Whether it’s assurance, tax or advisory needs, our manufacturing consulting professionals have tailored solutions for industry challenges including workforce shortages, automation, artificial intelligence, inflation and costing pressures or supply chains disruption.

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We help food and beverage companies navigate changing consumer demands, innovation and the global landscape to bring insight and innovation. 

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Baker Tilly’s energy team, lead out of Texas, works with oil and gas, upstream, midstream, downstream, power and utilities, and renewable energy.

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Contributing to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks

Baker Tilly’s tax team contributes to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks.

Value-Added Tax

Tax-exempt organizations have a new cash flow opportunity

An introduction to tax engines in the world of VAT

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