By John Kapral, CPA – Senior Director, Renewable Energy Tax Incentives and Credits, Walker Blue

The short version. Direct pay, formally called elective pay, lets a public school district receive the value of a federal clean-energy tax credit as a cash payment from the IRS, even though the district owes no federal income tax. On a qualifying solar, storage, or geothermal project, that payment may be worth up to 30% of eligible project costs when the applicable requirements are met.

What direct pay is

Federal clean-energy tax credits used to reward only organizations that owe federal tax. A school district generally pays no tax     , so for years these credits sat out of reach. The Inflation Reduction Act changed that in 2022 by adding Section 6417 to the Internal Revenue Code. Elective pay lets a tax-exempt or governmental entity treat an eligible credit as a payment of tax and receive the amount back as cash after it files. Treasury and the IRS issued comprehensive rules in March 2024, with periodic revisions.

Public school districts are named applicable entities under the statute, alongside state and local governments, tribal governments, and other tax-exempt organizations. The One Big Beautiful Bill Act, enacted July 4, 2025, kept elective pay in place for these entities. Some project-level details, particularly timing and sourcing for certain technologies, changed under that law, and the sections below cover them.

Why it matters for a school district

A district does not need to find a tax-equity partner or win a competitive grant to benefit. It owns the project, meets the requirements, and files for the payment. For a facilities budget, that converts a federal credit into a usable source of project funding rather than a benefit that only helps a private investor. On a large solar or geothermal installation, the payment can offset a meaningful share of the capital cost.

Which school projects tend to qualify

The investment tax credit covers a defined set of clean-energy property. The equipment most relevant to school facilities, and the current outlook for each, is below.

Technology	Credit	Current outlook for new projects
Battery storage	ITC (Section 48E)	Carved out of the near-term phase-down. Full credit for construction that begins through 2033, then a stepped reduction.
Geothermal heat pumps	ITC (Section 48)	30% with prevailing wage and apprenticeship for construction that starts through 2032, then 26% for 2033 and 22% for 2034.
Rooftop or ground solar	ITC (Section 48E)	Tighter timing after the 2025 law. Begin-construction and placed-in-service deadlines apply, so solar needs a project-specific timing check.
Combined solar plus storage	ITC (Section 48E)	Common on school campuses. The solar and storage components can carry different timing rules and are best assessed together.

Outlook reflects the 2025 One Big Beautiful Bill Act as understood in July 2026. Deadlines and phase-down percentages depend on project facts and continue to be clarified by IRS guidance, so confirm timing for any specific project before committing.

How much a district can receive

The investment tax credit is generally worth up to 30% of the eligible project cost when the project meets prevailing wage and apprenticeship requirements or has a net output of less than 1 megawatt. Bonus adders for domestic content, energy-community location, or low-income siting may raise the amount on some projects. The base rate drops sharply when       labor requirements apply but are missed, and can drop further in those cases if the domestic content requirement is not met, so those elements      belong in the plan from the first design meeting, not the final filing.

The payment is cash refunded      by the IRS, not a reduction of a tax bill the district does not have. Eligibility rests on the project and its documentation, not on the district’s balance sheet.

The five steps to a payment

Elective pay follows a set sequence, and the most important point sits at the start: eligibility is determined during design, not at filing. Decisions made early about system configuration, labor requirements, and sourcing set what the district can ultimately claim.

1. Confirm eligibility during design. Establish which credit applies, whether prevailing wage and apprenticeship requirements apply, and how the project will meet sourcing rules. This is where the value is won or lost.
2. Place the project in service. The property must be operational and meet the credit requirements in the tax year for which the district will claim the payment.
3. Complete IRS pre-filing registration. Register the project through the IRS Energy Credits Online portal and receive a registration number for each credit and facility. This step must be finished before the return is filed.
4. File the return with the registration number. Submit the required federal return with the source credit form and the general business credit form, report the registration number, and make the elective pay election by the due date, including extensions.
5. Receive the payment. The IRS issues the payment after it processes the return. Plan cash-flow expectations around a return-processing timeline rather than an instant rebate.

The domestic content gate for 2026 and later projects

For a project that begins construction in 2026 or later, an elective pay recipient generally must meet the federal domestic content requirements, or the credit may be reduced to zero. A project with a net output under one megawatt is exempt, and narrow cost and availability exceptions may apply. For most new school projects, this is the single most important item to settle during design. Treat it as a gating question, confirmed with a tax professional, not a detail to handle later.

A realistic timeline

From a facilities-planning view, elective pay is a multi-year sequence rather than a form filed at year-end. Registration and the eligibility groundwork sit well ahead of the payment.

Stage	What happens
Design and procurement	Credit path, labor requirements, and sourcing plan are set. This determines the eventual payment.
Construction to in-service	Documentation is built as the work proceeds, including prevailing wage and sourcing records.
After in-service, before filing	Pre-filing registration is completed, and registration numbers are received.
Tax filing	The return and elective pay election are filed by the due date, including extensions.
Payment	The IRS issues the direct payment after processing.

Documentation built during construction, rather than reconstructed afterward, is what supports the claim if the IRS asks questions later.

Questions districts ask

Our district pays no federal tax. Can we really receive money?

Yes. Elective pay was written for entities in exactly that position. The credit is paid as cash rather than used to offset a tax bill.

Does the money come from a grant program with a funding cap?

No. Elective pay is a tax provision, not a competitive grant. A district that meets the requirements claims the payment by filing, and there is no application queue to win.

Can a third party claim the credit instead of the district?

Ownership drives eligibility. A district that owns the system can elect direct payment. Under a third-party ownership or lease structure the analysis differs, so settle the ownership model early.

What most often reduces or eliminates the payment?

Two items for projects if 1 MW or greater output. Missing the prevailing wage and apprenticeship requirements can cut the credit substantially. Missing domestic content on a 2026-or-later construction start can remove it entirely unless an exception applies.

How long until the payment arrives?

The payment follows return processing, so plan it as part of a multi-year project timeline rather than an immediate rebate at purchase.

Where do the rules come from?

Elective pay is Section 6417 of the Internal Revenue Code, added by the Inflation Reduction Act, with final Treasury and IRS rules issued in March 2024 and adjustments under the July 2025 tax law.

Thinking about a project on your campus?

Walker Blue supports school districts, ESCO’s, and engineering firms in confirming which credit applies, meeting the labor and sourcing requirements, completing pre-filing registration, and preparing an audit-ready file. Start a conversation about a specific project at walker-blue.com.

About the author

John Kapral, CPA, is Senior Director of Renewable Energy Tax Incentives and Credits at Walker Blue, an energy tax incentive and clean-energy engineering firm. Walker Blue supports owners, school districts, and design teams nationally on investment tax credit and direct pay projects, with senior practitioners and audit-ready documentation.

This article is general educational information, not tax or legal advice. Eligibility, credit amounts, and deadlines depend on the facts of each project and on IRS and Treasury guidance that continues to change. Confirm any figure or date with a qualified tax professional before acting.

Sources: Internal Revenue Code Section 6417; Treasury and IRS final regulations on elective payment of applicable credits, March 2024; One Big Beautiful Bill Act, enacted July 4, 2025. Published July 2026. Refresh on new IRS or Treasury guidance.