Sec. 1.6417-4 Elective payment election for electing taxpayers that are partnerships or S corporations.
(a) In general. In the case of any applicable credit determined with respect to any applicable credit property described in §1.6417-1(e)(3), (5), or (7) that is held directly (or treated as held directly because it is held by a disregarded entity) by an electing taxpayer that is a partnership or S corporation, any elective payment election under §1.6417-2(b) must be made by the partnership or S corporation.
(b) Elections. If an electing taxpayer that is a partnership or S corporation makes an elective payment election under §1.6417-2(b) with respect to any taxable year in which the electing taxpayer places in service applicable credit property described in §1.6417-1(e)(3) or (5), or produces, after December 31, 2022, eligible components (as defined in section 45X(c)(1)) at an applicable credit property described in §1.6417-1(e)(7), the electing taxpayer will be treated as an applicable entity for purposes of making an elective payment election for such taxable year and during the election period described in §1.6417-3(e)(3), but only with respect to the applicable credit property described in §1.6417-1(e)(3), (5), or (7), respectively, that is the subject of the election. In addition, the taxpayer must otherwise meet all requirements to earn the credit in the electing year and in each succeeding year during the election period described in §1.6417-3(e)(3).
(c) Effect of election—
(1) In general. If a partnership or S corporation electing taxpayer makes an elective payment election, with respect to the section 45V, 45Q, or 45X credit--
(i) The Internal Revenue Service will make a payment to such partnership or S corporation equal to the amount of such credit, determined in accordance with paragraph (d) of this section (unless the partnership or S corporation owes a Federal tax liability, in which case the payment may be reduced by such tax liability);
(ii) Before determining any partner’s distributive share, or S corporation shareholder’s pro rata share, of such credit, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed solely to such entity (and not allocated or otherwise allowed to its partners or shareholders) for such taxable year;
(iii) Any amount with respect to which such election is made is treated as tax exempt income for purposes of sections 705 and 1366 of the Code;
(iv) A partner’s distributive share of such tax exempt income is equal to such partner’s distributive share of the otherwise applicable credit for each taxable year, as determined under §1.704-1(b)(4)(ii);
(v) An S corporation shareholder’s pro rata share (as determined under section 1377(a) of the Code) of such tax exempt income for each taxable year (as determined under sections 444 and 1378(b) of the Code) is equal to the S corporation shareholder’s pro rata share (as determined under section 1377(a)) of the otherwise applicable credit for each taxable year; and
(vi) Such tax exempt income resulting from such election is treated as received or accrued, including for purposes of sections 705 and 1366, as of the date the applicable credit is determined with respect to the partnership or S corporation. (such as, for investment credit property, the date the property is placed in service).
(2) Electing partnerships in tiered structures. If a partnership (upper-tier partnership) is a direct or indirect partner of a partnership that makes an elective payment election (electing partnership) and directly or indirectly receives an allocation of tax exempt income resulting from the elective payment election made by the electing partnership, the upper-tier partnership must determine its partners’ distributive shares of such tax exempt income in proportion to the partners’ distributive shares of the otherwise applicable credit as provided in paragraph (c)(1)(iv) of this section.
(3) Character of tax exempt income. Tax exempt income resulting from an elective payment election by an S corporation or a partnership is treated as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A) of the Code. As such, the tax exempt income is not treated as passive income to any partners or shareholders who do not materially participate within the meaning of section 469(c)(1)(B).
(d) Determination of amount of the credit—
(1) In general. In determining the amount of an applicable credit that will result in a payment under paragraph (c)(1)(i) of this section, the partnership or S corporation must compute the amount of the applicable credit allowable as if an elective payment election were not made. Because a partnership or S corporation is not subject to sections 38(b) and (c) and 469 (that is, those sections apply at the partner or S corporation shareholder level), the amount of applicable credit determined by a partnership or S corporation is not subject to limitation by those sections. In addition, because the only applicable credits with respect to which a partnership or S corporation may make an elective payment election are not investment credits under section 46 of the Code, sections 49 and 50 of the code do not apply to limit the amount of the applicable credits.
(2) Example. The rules of this paragraph (d) are illustrated in the following example. A and B each contributed cash to P, a calendar-year partnership, for the purpose of manufacturing clean hydrogen at V, a qualified clean hydrogen facility that meets the definition of section 45V(c)(3). The partnership agreement provides that A and B share equally in all items of income, gain, loss, deduction and credit of P. P completes the pre-filing registration process with respect to the section 45V credit at V for 2023 in accordance §1.6417-5. P places V in service in 2023. P timely files its 2023 Form 1065 and properly makes the elective payment election in accordance with §§1.6417-2(b),1.6417-3, and 1.6417-4. On its Form 1065, P properly determined that the amount of the section 45V credit with respect to the clean hydrogen produced at V for 2023 is $100,000. The IRS processes P’s return and makes a $100,000 payment to P. Before determining A’s and B’s distributive shares, P reduces the credit to zero. While the $100,000 section 45V credit is deemed to have been allowed to P for 2023 for any other purpose under this title, the credit is not allocated or otherwise allowed to its partners. The $100,000 is treated as tax exempt income for purposes of section 705 and is treated as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A). P allocates the tax exempt income from the elective payment election proportionately among the partners based on each partner’s distributive share of the otherwise eligible section 45V credit as determined under §1.704-1(b)(4)(ii). Under that section, if partnership receipts or expenditures give rise to a credit, the partner’s interest in the partnership with respect to such credit is in the same proportion as such partners’ distributive shares of such receipt, loss, or deduction. Section 45V credits arise based on the amount of clean hydrogen produced at a facility. Under the partnership agreement, A and B share all items equally. Thus, A and B will each be allocated $50,000 of tax exempt income for 2023. P will continue to be treated as an applicable entity with respect to V for taxable years 2024-2027 unless P revokes its election in accordance with §1.6417-3(e)(3)(ii). At the end of 2023, A and B increase their respective tax bases in their partnership interest and capital accounts by $50,000 each (that is, their share of the $100,000 of tax exempt income).
(e) Partnerships subject to subchapter C of chapter 63. For the application of subchapter C of chapter 63 of the Code to section 6417, see §301.6241-7 of this chapter.
(f) Applicability date. This section applies to taxable years ending on or after March 11, 2024. For taxable years ending before March 11, 2024, taxpayers, however, may choose to apply the rules of §§1.6417-1 through 1.6417-4 and 1.6417-6, provided the taxpayers apply the rules in their entirety and in a consistent manner.
[Added by T.D. 9988, 89 FR 17546-17596, Mar. 11, 2024.]
