Disclaimer: This material has been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, accounting or legal advice. This resource is a summary of final guidance on the elective pay provision released by the IRS on March 5, 2024. This guidance may be superseded by any changes made by the IRS upon further iterations of guidance.

Although every effort has been made to provide complete and accurate information, WRI makes no warranties, express or implied, to the accuracy of this summary and assumes no liability for its use. You are strongly encouraged to review the official IRS guidance or any subsequent versions of the guidance the IRS may issue.

Federal incentives like the Inflation Reduction Act's (IRA) Qualified Commercial Clean Vehicle Credit (45W) and the Alternative Fuel Vehicle Refueling Property Credit (30C) can reduce the cost for a new electric school bus (ESB) as well as charging infrastructure. School districts can access these incentives through the IRA’s elective pay mechanism, which provides a new and streamlined way for tax-exempt entities to access these tax credits.

The Qualified Commercial Clean Vehicle Credit (45W): a tax credit that provides up to $40,000 for each delivered electric school bus. 

The Alternative Fuel Vehicle Refueling Property Credit (30C): a tax credit that provides up to 30% of project costs, with a maximum of $100,000, for electric charging infrastructure installed in low-income or non-urban communities. 

Elective Pay (or “Direct Pay”): the mechanism by which schools can claim the IRA clean energy and clean vehicle tax credits and receive a payment upon successful filing.

To help districts take advantage of these credits in their school bus electrification projects, this article covers:

1. Elective pay and the relevant clean energy tax credits, including the Qualified Commercial Clean Vehicle Credit (45W) and the Alternative Fuel Vehicle Refueling Property Credit (30C)
2. The IRS pre-filing registration process and general considerations for elective pay
3. Combining tax credits with grants and loans 
4. Additional resources and partners

The Inflation Reduction Act available tax credits for school districts and elective pay provision

The Inflation Reduction Act (IRA; P.L. 117-169), enacted in August 2022, established and expanded tax credits for clean energy and climate investments, which are available until December 31, 2032. The most relevant provisions for electric school buses are the Qualified Commercial Clean Vehicle (Section 45W) and Alternative Fuel Refueling Property (Section 30C) tax credits.

For the first time, school districts and other tax-exempt entities can access these credits through the elective pay mechanism. Elective pay (also known as direct pay) is a mechanism established by the IRA that allows tax-exempt entities, like school districts, to claim these credits and receive a cash payment after successful filing. This provides a new ability for school districts to utilize tax credits to invest in clean energy and climate projects like electric school buses and charging. Please refer to IRS Publication 5817G (6-2023) which includes the many clean energy tax credits eligible for elective pay. Please note that not all of these credits are relevant for school districts.

Tax Credit for Qualified Commercial Clean Vehicles (Section 45W)

The Inflation Reduction Act of 2022 created a new tax credit for commercial clean vehicles, with up to $40,000 available for each vehicle weighing more than 14,000 pounds.

This maximum credit is $40,000 per electric school bus and is determined by calculating the lesser of: 30% of the cost basis of the electric vehicle or the incremental cost against that of a comparable vehicle. For examples of how this credit is calculated, please refer to this Section 45W 2-pager.

There are no geographical restrictions for this tax credit, which means any school district purchasing an electric school bus may be able to file for this credit.

IRS published a “safe harbor” provision for incremental cost, allowing school districts to use the Department of Energy’s calculations for incremental cost. However, if preferred, entities will be able to make independent determinations for incremental cost.

For more information on filing for the credit, please see Electrification Coalition’s annotated tax form for this credit (Form 8936).

Learn more about the Section 45W tax credit

Tax Credit for Alternative Fuel Refueling Property (Section 30C)

The Inflation Reduction Act of 2022 allows for a tax credit up to 30% of project costs, up to $100,000, that can be used for each unit of charging infrastructure in low-income and non-urban areas, if school districts meet prevailing wage and apprenticeship requirements. If districts do not meet prevailing wage and apprenticeship requirements, the credit amount is capped at 6% of project costs.

To help determine eligibility, districts can use the Department of Energy’s Argonne National Laboratory 30C Eligibility Locator which demonstrates if the project location falls within an eligible census tract.

Please note that at the time of publishing this article, the IRS has not yet released final guidance for 30C, including what is considered a “single unit of charging infrastructure” and what is included in the cost basis of the 30C project.

Additionally, at the time of publishing this article, the IRS has not yet finalized guidance for prevailing wage and apprenticeship requirements. However, based on proposed IRS guidance and the Inflation Reduction Act, to receive the full value of the 30C tax credit, laborers and mechanics employed in the construction, alteration and repair of the charging infrastructure will need to be paid at least a prevailing wage. It is also critical that apprentices from registered apprenticeship programs are utilized for a certain number of hours. For more information, please visit IRS’s website.

For more information on filing for the credit, please see Electrification Coalition’s annotated tax form for this credit (Form 8911).

Learn more about the Section 30C tax credit

Process for claiming elective payment for electric school bus-related tax credits

Elective pay became eligible after December 31, 2022 and is accessible once a project has been completed. Just like how individuals pay taxes after the end of the calendar tax year, school districts will claim elective pay at the conclusion of the tax year in which the project was completed.

There are three basic steps to claim elective pay:

Image

Once a school district has received its electric school buses and/or installed charging infrastructure, the district can begin the process of claiming elective pay by completing a pre-filing registration with the IRS.

This pre-filing process allows the IRS to verify the projects school districts wish to claim for the credits. Districts can begin the pre-filing process once all the projects for which they’re seeking credits are completed. The underlying credit includes a definition of “completed project.” For example, for 45W, the definition of a completed project is when the project is “placed in service,” which is understood by IRS to be when the bus is delivered.

The pre-filing registration process requires that school districts submit certain information. Schools should consider the following items when submitting their pre-filing registration:

• Identify the school district (standard taxpayer identifying information such as name, address and EIN)
• Identify what credits the school will be applying for (e.g., 45W and/or 30C)
• Identify each eligible project and/or property that is attributed to the applicable credit (e.g., each delivered bus), including any solar and other non-transportation projects, to pre-register all in one batch
• Identify and collect documents to prove project completion (e.g., VIN numbers, certificate of title showing ownership, time of sale documents, copy of a registration document issued by a government authority.)

According to IRS’s Pre-Filing Registration User Guide, the IRS recommends pre-filing at least 120 days before the annual filing deadline, to provide enough time in case IRS requests any amendments to the pre-filing. For tax-exempt entities like school districts, the annual filing deadline is 4.5 months after the end of their taxable year. For first-time filers, the IRS provides an automatic extension for annual filing of up to 6 months after the annual filing deadline (e.g., instead of the annual filing being due on May 15, the deadline is extended until November 15). At the successful completion of pre-filing registration, school districts will receive registration numbers that must be included in an annual tax return.

Elective pay is available for those eligible tax credits from taxable years after December 31, 2022, through December 31, 2032. IRS has issued guidance for tax-exempt entities that do not have an established tax year, including any school districts, to file under their standard accounting period (i.e., fiscal year) or use a calendar year tax year (i.e., January-December) that differs from their standard fiscal year.

That means districts have two options to determine their taxable year when filing:

1. Elect to use the calendar year as a tax year. Filing under a calendar year allows applicable projects placed into service in 2023 under the 2022 Fiscal Year (for example, July 1, 2022 through June 30, 2023) to still be claimed through elective pay. For an example of this, please see the timeline below.

• If electing to use a calendar year instead of their fiscal year, school districts should ensure that they maintain clear records including a reconciliation of any difference between their regular books of account and their chosen taxable year.
• This option is only available for first time filers who do not have a defined tax year already (i.e. have not filed an annual tax return with the IRS previously)
• If a school elects to use a calendar year that differs from their typical fiscal year, it can shift its tax year back in the future, and IRS will be releasing instructions and information on this process (see Q23).

2. Use the school’s standard accounting period or fiscal year. For most school districts, this would likely run from July 1 to June 30.

Below are two approaches to filing for the 45W and 30C credits for a school district whose fiscal year is July 1, 2023, to June 30, 2024. The graphic also illustrates how the “placed in service” date should be considered as school districts determine if they wish to elect to use a calendar year or stick with their fiscal year.

General considerations for applying for elective pay

Here are additional considerations for districts applying for elective pay.

• Filers should submit all projects for pre-filing in one batch to streamline IRS review, including any non-ESB projects.
  • Any EIN used to apply for elective pay can only be used once during any fiscal year.
  • School districts should communicate early with their district’s and/or local government’s finance offices, as relevant, to be aware of any other potentially eligible projects happening during a fiscal year so that pre-filing for all applicable credits can be completed together.
  • As noted in the IRS User Guide, after a pre-filing registration application is submitted, the school’s account will be locked while the IRS reviews the application, which can take up to 120 days.
• Submitters should start communicating early with their legal and financial offices to ensure a streamlined and effective filing process.
  • During this process, school districts should identify who at the district will be submitting the pre-filing registration application. If anyone at the district already has an ID.me account associated with the district, that person will likely be the person to submit the pre-filing application. For example, if a district has received American Rescue Plan Act (APRA) funding, then an associated ID.me account likely exists.
• Districts can consider working with bus dealers, OEMs and charging companies to consider how elective pay can be included in the procurement process.
• A school district’s authorized representative should familiarize themselves with IRS’s Pre-Filing Registration Tool User Guide and Instructions, which details the application process and additional information about all direct pay eligible tax credits.
• Submitters should continue to refer to the IRS Elective Pay Frequently Asked Questions resource, as information around elective pay is evolving and an iterative process.

Stacking tax credits with grants and loans

Per IRS guidance, tax credits can be stacked with tax-exempt grants and forgivable loans. For electric school bus projects, this can include funding from EPA under the Clean School Bus Program, the Clean Heavy Duty Vehicle Program, and Diesel Emissions Reduction Act, as well as many other federal and state funding programs.

In determining how much a school district may receive in a tax credit, the IRS will look at the cost basis of the project — meaning, the total cost of the electric school bus or charging infrastructure. As articulated in the graphic below, a tax-exempt grant or forgivable loan is included in the calculation of the cost basis of the project (e.g., a $300,000 grant to purchase an electric school bus would be factored into the total cost of the project).

If the school district used its own funds, such as its transportation budget, these are considered “unrestricted funds” and do not affect the cost basis of the tax credit. For example, a district using $50,000 from its transportation budget to cover the remaining cost of an electric school bus after receiving a federal grant would not reduce the value of the tax credit.

After including the total value of the grant combined with the tax credit, these amounts cannot exceed the project's cost basis (e.g., the purchase price of the electric school bus or charging infrastructure). In such a case, the maximum value of the tax credit will be reduced to equal the total cost of the project.Consider the three examples below on how different grant amounts impact the amount a school district may receive in a 45W tax credit.

Please note that at the time of this publication, final guidance for the Alternative Fuel Refueling Property Credit (30C) has not yet been released, therefore there is still an outstanding question about what project costs are included in the cost basis for charging infrastructure.

Additional resources

• Office Hours hosted by IRS to support pre-filing registrations
• UndauntedK12’s Inflation Reduction Act webpage
• WRI’s Electric School Bus Initiative’s free 1:1 sessions
• Elective Pay & IRA Incentives Resource Page – Lawyers for Good Government
• Ask a tax lawyer – a live FAQ portal and page updated by Lawyers for Good Government