Elective Payment of Applicable Credits (I.R.C. 6417)

Overview

An applicable entity that meets all the requirements of section 6417 is permitted to make an election under section 6417 with respect to any applicable credit determined with respect to the applicable entity for the taxable year (elective payment election). If an applicable entity makes an elective payment election, the applicable entity is treated as making a payment against federal income taxes imposed by subtitle A of the Code (subtitle A) for the taxable year with respect to which such credit was determined that is equal to the amount of such credit (elective payment amount). An election under section 6417 must be made at such time and in such manner as provided by the Secretary of the Treasury or such person’s delegate.

Proposed Regulations (88 Fed. Reg. 40,528) and Temporary Regulations (88 Fed. Reg. 40,086) relating to section 6417 were released June 21, 2023. Final Regulations (89 Fed. Reg. 12,546) relating to 6417 were released March 11, 2024 (hereinafter, the “Regulations”).

See National Association of Bond Lawyers comments regarding the Proposed Regulations published August 14, 2023. See American Bar Association comments regarding the Proposed Regulations also published August 14, 2023.

“Elective payments” are “direct payments” – Not!

Direct payments under section 6431 are not elective payments! To avoid confusion between (1) direct payments available under former section 6431 with respect to build America bonds and certain qualified tax credit bonds for which the direct payment election was made and (2) payments made available under section 6417, the latter are referred to herein and by the Treasury Department generally as “elective payments,” even though such elective payments are also direct payments.

When must Form 990-T be filed to make the elective payment election?

• Section 6417(d)(3)(A)(i): The election must be made (i.e., Form 990-T filed) no later than the due date (including extensions of time) of the tax return for the taxable year for which the election is made. In the case of any government or political subdivision for which no tax return would otherwise be required, the election must be made “as is determined appropriate by the Secretary.”
• Section 1.6417-2(b)(3)(i) of the Regulations applies to entities for which no federal income tax return is typically required. For such entities, the Form 990-T must be filed by the 15th day of the fifth month after the “taxable year” determined by section 441. The Final Regulations go on to state that, if an applicable entity is filing “solely to make an elective payment election, [it] may choose whether to file its first return (and thus adopt a taxable year for purposes of section 6417) based upon a calendar or fiscal year.” Assume the entity’s fiscal year ends December 31. In this case, the Form 990-T must be filed by May 15 of the following year. Subject to future guidance, an automatic paperless six-month extension from the original due date is currently deemed to be allowed, which means the extended due date is November 15, as already noted above.
• Section 1.6417-2(b)(3)(iii) of the Regulations applies to entities that do file federal income tax returns. For such entities, the Form 990-T is due when it would normally be due.

When is the elective payment received?

See Question 25 of the FAQs released contemporaneously with the Proposed Regulations and Temporary Regulations: “When do I receive my payment if I use elective pay? Can I receive a payment before the due date for an annual return?” In general, payments occur after the tax return is processed (assuming requirements are met). Under the statute, the taxpayer is not entitled to the elective payment until the due date of the return, even if the taxpayer files the return before that date. Assume the entity makes the elective payment election on the second day of its tax year – based on the above, the entity would need to wait for nearly 1.5 years to receive the elective payment.