IRS Bulletin No. 2026–26: Key Updates and Proposed Regulations

The Internal Revenue Bulletin No. 2026–26, released on June 22, 2026, introduces three pivotal developments reshaping tax administration and compliance across estate planning, nonprofit governance, and renewable energy incentives. These updates reflect broader legislative and administrative trends, including the lingering influence of the One Big Beautiful Bill Act (OBBBA) proposals, the ongoing implementation of the Inflation Reduction Act (IRA), and the IRS’s continued refinement of user fee structures under OMB Circular A-25 and the Independent Offices Appropriations Act (IOAA).

The Bulletin signals a significant administrative shift with the proposed increase in the estate tax closing letter user fee to $76, a move designed to align the IRS’s cost recovery with inflation and operational realities under OMB Circular A-25 and IOAA. This proposal underscores the agency’s broader strategy to modernize fee structures in response to resource constraints and statutory mandates. Concurrently, Notice 2026-36 advances proposed regulations under Section 4960, expanding the definition of covered employees for applicable tax-exempt organizations (ATEOs) in line with OBBBA’s legislative intent, while offering transition relief to mitigate compliance burdens during the interim period before final guidance. The inclusion of public comment solicitation reflects the IRS’s commitment to stakeholder engagement amid contentious debates over executive compensation in the nonprofit sector. Finally, Notice 2026-37 publishes the inflation-adjusted Section 45 renewable electricity production credit for 2026, incorporating the GDP Implicit Price Deflator to ensure parity with economic conditions and reinforcing the IRA’s long-term commitment to clean energy incentives.

These measures collectively highlight the IRS’s dual focus on administrative efficiency and policy alignment with legislative priorities, even as unresolved political tensions—such as the stalled OBBBA provisions—continue to shape the regulatory landscape. For practitioners, the Bulletin serves as a critical signal to prepare for heightened scrutiny in nonprofit compensation structures, strategic planning around renewable energy credits, and proactive management of estate administration timelines.

---

Estate Tax Closing Letter User Fee Hike: IRS Proposes Increase to $76

The IRS’s latest proposal to increase the estate tax closing letter user fee to $76—up from the current $56 and the prior $67—reflects a broader trend of administrative cost recovery under the Independent Offices Appropriations Act of 1952 (IOAA) and OMB Circular A-25. This proposed hike, outlined in Notice of Proposed Rulemaking REG-103193-26, is not merely a nominal adjustment but a recalibration of the fee to reflect the full cost of processing estate tax closing letters (IRS Letter 627), a service the IRS has determined confers special benefits to authorized requesters beyond general taxpayer access. The move arrives amid a period of heightened IRS scrutiny over estate administration timelines and administrative efficiency, signaling to practitioners that proactive management of estate filings and fee structures will be critical in the coming years.

The Rule: What the IRS Is Proposing

The IRS proposes to amend 26 CFR part 300 to increase the user fee for authorized persons requesting an estate tax closing letter (IRS Letter 627) from $56 to $76. This adjustment is the result of a biennial cost review conducted in 2025, which determined that the full cost of providing this service has risen to $76 per request. The fee increase follows a prior adjustment from $67 to $56 in 2025, which itself was based on a 2023 Cost Model. The current proposal is grounded in the IRS’s statutory authority under the IOAA and OMB Circular A-25, which require agencies to charge user fees that recover the full cost of services conferring special benefits to identifiable recipients.

The estate tax closing letter is a non-binding confirmation issued by the IRS to indicate that an estate tax return (Form 706) has been processed and accepted, though it does not preclude future audits. The fee applies only to authorized persons—typically executors, trustees, or legal representatives—who request the letter to facilitate estate administration, such as closing probate or distributing assets. The IRS has historically justified the fee under the IOAA, which permits agencies to charge for services that provide special benefits to specific recipients, and OMB Circular A-25, which mandates that such fees reflect the full cost of service provision unless an exception applies.

The proposed applicability date for the new $76 fee is 30 days after the final regulations are published in the Federal Register, with written or electronic comments due by July 2, 2026. The IRS has emphasized that the fee increase is not subject to review under Executive Order 12866 and is certified as having no significant economic impact on small entities, as estates are not considered small entities under the Regulatory Flexibility Act.

The Context: Purpose, Authority, and Historical Evolution

The estate tax closing letter (IRS Letter 627) serves a critical administrative function in the estate settlement process. While not legally required, it provides executors and beneficiaries with formal IRS acknowledgment that the estate tax return has been processed and no further adjustments are anticipated. This letter is particularly valuable in probate proceedings, where courts and financial institutions often require it as proof of tax compliance before releasing assets. The IRS’s decision to issue these letters only upon request—rather than automatically—has intensified demand for the service, as executors must now proactively seek the letter to avoid delays in estate administration.

The authority for the IRS to charge a user fee for this service stems from the IOAA of 1952 (31 U.S.C. §9701), which empowers federal agencies to prescribe regulations establishing user fees for services that provide special benefits to identifiable recipients. The IOAA requires that such fees be set at levels sufficient to recover the full cost of providing the service, unless an exception is granted. OMB Circular A-25 further refines this requirement by directing agencies to identify services that confer special benefits, assess whether user fees should be charged, and ensure that fees are reviewed and updated biennially to reflect changes in the cost of service provision.

The IRS’s approach to calculating the estate tax closing letter user fee has evolved over time. In 2021, the IRS established a $67 fee based on a 2019 Cost Model. This was later revised to $56 in 2025 following a 2023 Cost Model review. The current proposal to increase the fee to $76 reflects the IRS’s biennial review process, which identified a full cost of $76 per request. The IRS attributes the increase to a combination of operational factors, including staffing costs, overhead, and quality assurance reviews, all of which have risen in recent years.

The fee increase also aligns with broader trends in IRS user fee adjustments. For example, the IRS has raised fees for private letter rulings (PLRs) from $30,000 to $38,000 in recent years, reflecting inflation and increased demand for rulings. Similarly, the IRS has adjusted fees for other services, such as offer-in-compromise applications, to keep pace with administrative costs. These adjustments underscore the IRS’s commitment to recovering the full cost of services while maintaining operational efficiency.

The Calculation: How the IRS Determined the $76 Fee

The IRS’s calculation of the $76 user fee is grounded in generally accepted accounting principles (GAAP) and follows the cost accounting standards established by the Federal Accounting Standards Advisory Board (FASAB). Specifically, the IRS adheres to Statement of Federal Financial Accounting Standards 4 (SFFAS No. 4), which provides internal costing standards for federal agencies to accurately measure and manage the full cost of programs. The methodology used to calculate the estate tax closing letter user fee is consistent with these standards and reflects the IRS’s commitment to transparency and accountability in fee setting.

The IRS’s cost accounting system tracks costs to organizational units, known as cost centers, which are typically distinguished by subject-matter area or geographic region. All costs, including direct and indirect expenses, are recorded in the IRS’s cost accounting system and allocated to the relevant cost center. For the estate tax closing letter program, the IRS identified the cost centers responsible for processing requests and conducting quality assurance reviews.

The calculation of the $76 fee involved three primary components: request processing costs, quality assurance review costs, and overhead. The IRS processed an average of 8,053 requests per year for estate tax closing letters in fiscal years 2023 and 2024, requiring a total of 8,374 staff hours annually. This figure includes both direct hours (5,234 hours) and indirect hours (3,140 hours), which account for campus employees’ time spent on related activities. The direct hours were converted to a full-time equivalent (FTE) basis, resulting in a 4.03 FTE equivalent for processing requests.

The average salary and benefits cost per FTE was calculated at $92,812, based on the distribution of processing time across General Schedule (GS) levels: 36.85% at GS-5, 35.82% at GS-8, and 27.33% at GS-11. Multiplying the cost per FTE by the 4.03 FTE equivalent yielded a total labor and benefits cost of $374,032 for processing requests.

Quality assurance reviews were conducted on a sample of issued estate tax closing letters to verify authorization, accuracy, and address correctness. In fiscal years 2023 and 2024, an average of 24 estates were reviewed annually, with three letters reviewed per estate. Quality assurance professionals spent 0.5 hours reviewing each letter, resulting in a total of 58 staff hours allocated for reviews. The average salary and benefits cost for quality assurance professionals was $127,256 per FTE, based on the distribution of review time across Internal Revenue (IR) paybands IR-10 (25%) and IR-06 (75%). This yielded a total labor and benefits cost of $3,818 for quality assurance reviews.

Overhead costs, which include indirect expenses such as general management, rent, utilities, procurement, financial management, information technology, and human resources, were calculated using a 62.92% overhead rate. This rate was derived from the ratio of indirect labor, benefits, and non-labor costs to direct labor and benefits costs for business divisions that interact with taxpayers. Applying the overhead rate to the total labor and benefits cost of $377,850 resulted in an overhead cost of $237,743.

The full cost of the estate tax closing letter program was determined to be $615,593, based on the sum of processing labor and benefits ($374,032), quality assurance labor and benefits ($3,818), and overhead ($237,743). Dividing this full cost by the average annual volume of processed requests (8,053) yielded the proposed user fee of $76 per request.

The Implication: What Practitioners Need to Know

For estates, executors, and tax practitioners, the proposed increase to $76 represents a modest but meaningful escalation in administrative costs associated with estate administration. While the fee itself is not prohibitive, it underscores the IRS’s broader emphasis on recovering the full cost of services and may signal future adjustments to other user fees. Practitioners should anticipate that the IRS will continue to review and update fees biennially, particularly as operational costs rise and demand for services fluctuates.

The fee increase also reflects the IRS’s ongoing efforts to streamline administrative processes while maintaining service quality. The IRS’s cost accounting methodology, which includes detailed tracking of direct and indirect costs, ensures that the fee is grounded in transparent and defensible calculations. However, practitioners should be aware that the fee does not guarantee expedited processing, as the IRS’s current processing times for estate tax closing letters can still extend to several months.

The proposed applicability date—30 days after the final regulations are published—gives practitioners a narrow window to plan for the fee increase. Executors and legal representatives should factor the new fee into their estate administration budgets and consider submitting requests for estate tax closing letters as early as possible to avoid delays. Additionally, practitioners should monitor the IRS’s final regulations and any subsequent guidance to ensure compliance with the new fee structure.

The fee increase also highlights broader trends in IRS user fee adjustments, which have seen incremental hikes across various services in recent years. For example, the IRS has raised fees for private letter rulings (PLRs) from $30,000 to $38,000 in recent years, reflecting inflation and increased demand for rulings. Similarly, the IRS has adjusted fees for other services, such as offer-in-compromise applications, to keep pace with administrative costs. Practitioners should expect continued adjustments to user fees as the IRS seeks to balance cost recovery with service accessibility.

Finally, the proposed fee increase arrives at a time of heightened IRS scrutiny over estate administration timelines and administrative efficiency. The IRS’s decision to issue estate tax closing letters only upon request, rather than automatically, has intensified demand for the service and placed additional pressure on executors to proactively manage estate filings. Practitioners should advise clients to plan for potential delays and budget accordingly for the new fee structure.

In summary, the proposed increase to $76 for the estate tax closing letter user fee is a reflection of the IRS’s commitment to recovering the full cost of services while maintaining administrative efficiency. Practitioners should prepare for the fee increase by factoring it into estate administration budgets, submitting requests for closing letters in a timely manner, and staying informed about future IRS fee adjustments. The move underscores the importance of proactive estate planning and compliance with IRS administrative requirements in an evolving regulatory landscape.

---

Section 4960 Proposed Regulations: OBBBA Expands Covered Employees, IRS Offers Transition Relief

The IRS’s latest guidance under Notice 2026-36 signals a seismic shift in how tax-exempt organizations must classify executive compensation under Section 4960, reflecting the broader political and administrative evolution of nonprofit governance. This notice, issued as part of Bulletin No. 2026–26, not only addresses the statutory changes wrought by the One Big Beautiful Bill Act (OBBBA) proposals but also introduces critical transition relief for applicable tax-exempt organizations (ATEOs) navigating the expanded definition of "covered employee." For practitioners, this development demands immediate attention, as the IRS’s proposed regulations will fundamentally alter compliance strategies for executive compensation structures, particularly in organizations with complex interrelated entities.

The Rule: What the IRS Is Proposing

Section 4960 imposes a 21% excise tax on excess remuneration paid by an ATEO to its "covered employees" or excess parachute payments. Originally enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), Section 4960(c)(2) defined a covered employee as any individual who was among the five highest-compensated employees of the ATEO for the taxable year or had previously held that status in any year beginning after December 31, 2016. This limitation was intended to target only the most highly compensated executives within tax-exempt entities, leaving many lower-tier employees outside the scope of the tax. The IRS’s final regulations, published in January 2021 (T.D. 9938), codified this framework, including exceptions for employees working limited hours, those compensated through nonexempt funds, and those providing limited services.

However, the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, dramatically expanded the definition of a covered employee. Effective for taxable years beginning after December 31, 2025, the statute eliminated the five-highest-compensated-employee limitation entirely. Under the new regime, any employee of an ATEO (or its predecessor) who was employed in any taxable year beginning after December 31, 2016, is now considered a covered employee for all future taxable years, regardless of compensation level. This change effectively converts Section 4960 from a tax targeting only the highest earners into a sweeping compliance obligation that could ensnare thousands of additional employees across the nonprofit sector.

The IRS’s proposed regulations, as anticipated in Notice 2026-36, will address this expansion by removing all references to the five-highest-compensated-employee standard and revising the regulatory framework accordingly. The notice explicitly states that the forthcoming regulations will retain two key exceptions from the existing rules: the limited hours exception and the nonexempt funds exception. These exceptions were originally designed to prevent the inclusion of employees who performed only temporary or incidental services for an ATEO, particularly when such employees were compensated by related organizations rather than the ATEO itself. The IRS has indicated that it will not retain the limited services exception, as its original purpose—preventing low-compensated employees from displacing higher earners—is no longer relevant under the OBBBA’s expanded definition.

The proposed regulations are expected to apply prospectively, meaning they will not affect taxable years beginning before the issuance of final regulations. Until then, ATEOs may rely on the interpretations outlined in Notice 2026-36, which provides temporary relief by allowing continued use of the limited hours and nonexempt funds exceptions under the pre-OBBBA framework. This transition relief is critical for organizations that have structured compensation arrangements based on the existing regulations and need time to adapt to the new statutory reality.

The Context: Political, Industry, and Historical Forces Shaping Section 4960

The evolution of Section 4960 reflects a broader tension between congressional intent, administrative enforcement, and the operational realities of tax-exempt organizations. Enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), Section 4960 was a direct response to growing public and political scrutiny over executive compensation in the nonprofit sector, particularly in healthcare systems, universities, and large charitable organizations. The provision was designed to curb perceived excesses by imposing a punitive tax on compensation deemed excessive, while also addressing concerns about parachute payments that could incentivize executives to leave organizations abruptly.

The IRS’s initial regulatory approach, finalized in 2021, sought to balance enforcement with practicality by limiting the scope of the tax to only the highest earners. This approach was influenced by industry feedback, which highlighted the administrative burden of tracking all employees under a broader definition. However, the political landscape shifted dramatically with the introduction of OBBBA, a sweeping legislative proposal that sought to roll back or modify numerous TCJA provisions. While OBBBA itself did not pass in its original form, its inclusion of Section 4960 reforms signaled a growing appetite among some lawmakers to expand the reach of the excise tax, reflecting broader concerns about income inequality and the role of tax-exempt entities in the economy.

The nonprofit industry has responded to these developments with a mix of compliance anxiety and strategic adaptation. Large healthcare systems, in particular, have faced heightened scrutiny from both the IRS and state attorneys general over executive compensation practices. For example, the IRS’s 2022 memorandum (LB&I-04-0322-0011) clarified that for-profit subsidiaries of ATEOs could trigger Section 4960 liability if they shared employees with the tax-exempt parent, a ruling that has forced many organizations to restructure their compensation arrangements. Similarly, state-level initiatives, such as California’s AB 150 (2021), which imposes an additional 1.5% excise tax on excess compensation, have further intensified the compliance burden on tax-exempt organizations operating in multiple jurisdictions.

The IRS’s enforcement posture has also evolved in response to these pressures. While the agency initially took a relatively measured approach to Section 4960, recent audits have become more aggressive, with a particular focus on related organizations and deferred compensation arrangements. The Mayo Clinic case (2022), in which the IRS challenged the organization’s compensation structure and secured an $12 million settlement, serves as a cautionary tale for other ATEOs. These developments underscore the importance of proactive compliance strategies, including regular compensation reviews and documentation of "reasonable pay" justifications under IRC §162(m)(6), which governs executive compensation in tax-exempt organizations.

The Transition Relief: A Lifeline for ATEOs in Uncertain Times

Recognizing the operational challenges posed by the OBBBA’s expansion of the covered employee definition, the IRS has provided critical transition relief in Notice 2026-36. This relief allows ATEOs to continue relying on the limited hours and nonexempt funds exceptions as outlined in the existing Section 4960 regulations until final regulations are issued. This interim guidance is particularly valuable for organizations that have structured their compensation arrangements based on the pre-OBBBA framework and need time to adjust to the new statutory requirements.

The notice includes a detailed example to illustrate how the transition relief will operate in practice. In the example, ATEO 1 and CORP 2, a taxable-related organization, share employees A, B, and C. Employee A was a covered employee for ATEO 1 in 2025 because they were among the five highest-compensated employees and did not qualify for an exception. Under the post-OBBBA definition, Employee A remains a covered employee for 2026 and all future years because covered employee status is permanent once acquired. Employee B, who meets the limited hours exception for 2026, is not considered a covered employee for that year. Employee C, a former employee of ATEO 1 who was not among the five highest-compensated employees in 2020, is also not considered a covered employee for 2026 under the transition relief.

This example highlights the nuanced interplay between the pre- and post-OBBBA definitions of covered employee. For taxable years beginning on or before December 31, 2025, the old rules apply, meaning that only the five highest-compensated employees (or those who previously held that status) are considered covered employees. For taxable years beginning after December 31, 2025, the new definition takes effect, but the transition relief allows ATEOs to continue using the limited hours and nonexempt funds exceptions until final regulations are issued. This approach provides organizations with the flexibility to adapt their compensation structures without immediately triggering excise tax liability.

The Implication: What Practitioners Need to Know

The issuance of Notice 2026-36 and the forthcoming proposed regulations under Section 4960 represent a watershed moment for tax-exempt organizations, their executives, and the practitioners who advise them. The expansion of the covered employee definition means that ATEOs must now consider the potential excise tax implications for every employee who has ever worked for the organization, regardless of compensation level. This shift will require organizations to implement robust tracking systems to monitor employee status, compensation levels, and related-party arrangements to ensure compliance with Section 4960.

For executives, the expanded definition of covered employee increases the risk of excise tax liability for both the organization and the individual, particularly in cases where compensation exceeds $1 million. The permanence of covered employee status means that once an individual is classified as a covered employee, they remain so for all future taxable years, even if they leave the organization or their compensation decreases. This underscores the importance of careful compensation planning, particularly for executives who may transition between related organizations or take on additional roles within an ATEO’s network.

For tax practitioners, the new regulatory landscape demands a comprehensive review of existing compensation structures and related-party arrangements. Practitioners should advise ATEOs to:

1. Conduct a compensation audit to identify all current and former employees who may now fall under the expanded definition of covered employee.
2. Review related-party arrangements to determine whether employees of for-profit subsidiaries or other related organizations trigger Section 4960 liability.
3. Document "reasonable pay" justifications under IRC §162(m)(4), which governs executive compensation deductions.
4. Implement tracking systems to monitor employee status and compensation levels on an ongoing basis.
5. Prepare for the transition relief period by structuring compensation arrangements to take advantage of the limited hours and nonexempt funds exceptions where applicable.

The IRS’s request for public comments on the proposed regulations presents an opportunity for practitioners and industry stakeholders to shape the final regulatory framework. Comments are due on or before August 4, 2026, and may be submitted electronically via the Federal eRulemaking Portal or by mail to the IRS. Practitioners are strongly encouraged to submit comments, particularly on issues such as the adaptation of the limited hours and nonexempt funds exceptions to the new definition of covered employee and the appropriateness of applying these exceptions to officers of the ATEO. The IRS has indicated that it will publish all comments received, providing a platform for industry-wide dialogue on the practical implications of the proposed regulations.

In the broader context of tax-exempt organizations, the expansion of Section 4960 reflects a growing trend toward increased scrutiny of executive compensation and related-party transactions. State attorneys general, congressional oversight committees, and the IRS are all playing more active roles in policing nonprofit governance, driven by concerns about income inequality, transparency, and the misuse of tax-exempt status. For ATEOs, this means that compliance with Section 4960 is no longer optional but a critical component of overall governance and risk management.

The transition relief provided in Notice 2026-36 offers a temporary reprieve, but organizations must use this time wisely to adapt to the new regulatory landscape. The IRS’s enforcement posture is unlikely to soften, and the stakes for noncompliance are high, with potential excise tax liabilities, reputational damage, and increased scrutiny from regulators. Practitioners and ATEOs alike must approach this challenge with a proactive and strategic mindset, ensuring that their compensation structures are not only compliant with Section 4960 but also aligned with the broader principles of good governance and transparency.

---

Section 45 Renewable Electricity Production Credit: 2026 Inflation-Adjusted Credit Amounts and Reference Price Published

The Internal Revenue Service’s release of Notice 2026-37 arrives at a pivotal juncture for the renewable energy sector, as the Inflation Reduction Act’s (IRA) transformative amendments to Section 45 of the Internal Revenue Code continue to reshape the financial calculus for producers of qualified electricity. Published in IRB 2026–26, this notice formally establishes the inflation adjustment factor and reference price for calendar year 2026, providing the numerical foundation upon which the availability and magnitude of the Section 45 production tax credit (PTC) will be determined for wind, geothermal, and other eligible facilities. With the credit’s structure now hinging on precise inflation indexing and statutory reference prices, practitioners must navigate a framework that rewards compliance with prevailing wage and apprenticeship standards while phasing out support for facilities placed in service before key statutory deadlines.

The Rule: How the 2026 Figures Shape the Section 45 Credit

Notice 2026-37 announces that the inflation adjustment factor for calendar year 2026 is 2.0570, and the reference price for wind is 3.17 cents per kilowatt-hour (kWh). These values are not merely technical updates—they are the linchpins of a statutory architecture designed to calibrate the Section 45 credit to economic conditions while incentivizing the deployment of renewable energy infrastructure. The inflation adjustment factor, derived from the GDP Implicit Price Deflator, scales the base credit amount to reflect changes in the general price level, ensuring that the real value of the credit does not erode over time. The reference price, in turn, serves as a statutory threshold: if the average sale price of electricity from a qualified facility exceeds this benchmark, the credit phases out proportionally.

Under Section 45, the credit amount for a qualified facility is calculated as follows:

• For facilities placed in service before January 1, 2022, the credit is determined under pre-IRA rules, with the base amount adjusted annually for inflation and subject to phaseout if the reference price is exceeded.
• For facilities placed in service after December 31, 2021, the IRA amended Section 45 to provide a base credit of 2.75 cents per kWh, which is then multiplied by 5 (yielding 13.75 cents per kWh) if the facility meets the prevailing wage and apprenticeship requirements. If these requirements are not met, the credit is reduced to 20% of the full amount (2.75 cents per kWh). The 2026 inflation adjustment factor of 2.0570 is applied to this base amount, resulting in a 2026 credit rate of 5.656 cents per kWh for non-qualifying facilities and 28.28 cents per kWh for those that comply with the wage and apprenticeship standards.

The reference price of 3.17 cents per kWh for wind is particularly consequential. If the average sale price of electricity from a wind facility exceeds this amount, the credit is reduced by the excess amount, multiplied by the number of kilowatt-hours produced. For example, if the average sale price is 3.5 cents per kWh, the excess of 0.33 cents per kWh would reduce the credit by 0.33 cents per kWh for each kWh produced. This phaseout mechanism ensures that the credit does not subsidize facilities operating in highly profitable markets where market forces alone would support development.

The Context: The IRA’s Transformation of Section 45 and the Renewable Energy Landscape

The publication of these figures must be understood against the backdrop of the Inflation Reduction Act (IRA) of 2022, which fundamentally altered the credit’s structure and expanded its reach. Enacted in August 2022, the IRA extended the Section 45 credit through 2032 and introduced a suite of enhancements designed to accelerate the transition to clean energy. Among the most consequential changes was the expansion of eligibility to include solar facilities (previously limited to facilities placed in service before 2022) and the introduction of bonus credits for projects meeting domestic content requirements or located in "energy communities" (e.g., areas with significant fossil fuel employment or brownfield sites).

The IRA also introduced prevailing wage and apprenticeship requirements, which, if satisfied, increase the credit by a factor of 5. These requirements, codified in Section 45(b)(6)(B), mandate that laborers and mechanics employed in the construction, alteration, or repair of a qualified facility be paid wages at least equal to the prevailing rates for similar work in the locality, as determined by the Secretary of Labor. Additionally, apprentices must constitute a specified percentage of the total workforce. Failure to meet these standards reduces the credit to just 20% of the full amount, a penalty that can significantly diminish the financial viability of a project.

The political and economic context of these changes cannot be overstated. The Biden administration’s emphasis on domestic manufacturing and union labor further shaped the IRA’s provisions, embedding prevailing wage requirements into the fabric of the credit. Industry stakeholders, from large utilities to independent developers, have scrambled to align their projects with these new standards, often restructuring supply chains and labor agreements to qualify for the enhanced credit.

The renewable energy sector has responded with unprecedented investment. According to the U.S. Energy Information Administration (EIA), wind and solar capacity additions in 2024 exceeded 30 gigawatts, a record high, driven in part by the IRA’s incentives. The Section 45 credit, once a niche provision, has become a cornerstone of project financing, with developers increasingly relying on tax equity partnerships to monetize the credit. The IRS’s issuance of Notice 2026-37 thus arrives at a moment when the credit’s availability and generosity are central to the industry’s growth trajectory.

The Calculation: How the Inflation-Adjusted Credit and Reference Price Are Derived

The IRS’s calculation of the 2026 Section 45 credit is grounded in statutory formulas and economic data compiled by federal agencies. The inflation adjustment factor for Section 45 is calculated using the GDP Implicit Price Deflator (IPD), a broad measure of inflation published by the Bureau of Economic Analysis (BEA). The IPD reflects the ratio of nominal GDP to real GDP, adjusted for changes in the price level of all goods and services produced in the United States. For 2026, the IPD is projected to increase by 2.0570, meaning that the base credit amount for qualified facilities will be scaled by this factor to account for inflation.

The reference price, by contrast, is a statutory construct tied to the average sale price of electricity from wind facilities. The IRS calculates this price annually using data from the Energy Information Administration (EIA) and other sources. For 2026, the reference price for wind is set at 3.17 cents per kWh, a figure that reflects the EIA’s projections for wholesale electricity prices in the coming year. If the average sale price of electricity from a wind facility exceeds this reference price, the credit is reduced by the excess amount, multiplied by the number of kilowatt-hours produced. This phaseout mechanism ensures that the credit does not subsidize facilities operating in markets where electricity prices are already high enough to support development without additional incentives.

The interplay between the inflation adjustment factor and the reference price is critical. As inflation drives up the base credit amount, the reference price may also rise, potentially triggering phaseouts for facilities in high-price markets. Conversely, if inflation remains subdued, the credit’s real value may erode, reducing its effectiveness as an incentive. The IRS’s publication of these figures in Notice 2026-37 provides certainty for developers and investors, allowing them to model the financial viability of projects with precision.

The Implication: What These Figures Mean for Renewable Energy Producers

For renewable energy producers, the 2026 inflation adjustment factor and reference price carry profound implications. Developers of wind, geothermal, and other qualified facilities must now assess how these figures affect the credit’s availability and magnitude, particularly in light of the IRA’s prevailing wage and apprenticeship requirements. Facilities placed in service before January 1, 2022, will continue to rely on the pre-IRA credit structure, with the 2026 inflation adjustment factor applied to their base credit amounts. For these facilities, the credit remains subject to phaseout if the reference price is exceeded, though the phaseout threshold is less punitive than for post-2021 facilities.

For facilities placed in service after December 31, 2021, the Section 45 credit is significantly more generous, but only if the prevailing wage and apprenticeship requirements are met. The 2026 credit rate for qualifying facilities is 28.28 cents per kWh, a figure that dwarfs the pre-IRA credit of 2.75 cents per kWh. However, failure to comply with the wage and apprenticeship standards reduces the credit to just 5.656 cents per kWh, a penalty that can render a project financially unviable. Developers must therefore prioritize compliance, ensuring that labor agreements and supply chain arrangements align with the IRS’s requirements.

The phaseout mechanism adds another layer of complexity. For wind facilities, if the average sale price of electricity exceeds 3.17 cents per kWh in 2026, the credit will be reduced by the excess amount. This means that even facilities meeting the prevailing wage and apprenticeship requirements could see their credit diminished if market conditions push electricity prices above the reference price. Developers in high-price markets, such as California or the Northeast, must carefully model the impact of the phaseout on their project’s economics.

The IRS’s issuance of Notice 2026-37 also underscores the importance of documentation and compliance. Developers must maintain meticulous records of labor agreements, prevailing wage determinations, and apprenticeship participation to substantiate their eligibility for the enhanced credit. The IRS has signaled that it will scrutinize these claims, particularly in light of the IRA’s emphasis on labor standards. Practitioners advising renewable energy clients should therefore recommend proactive compliance reviews and the establishment of robust documentation protocols.

In the broader context of tax-exempt organizations, the expansion of Section 45 reflects a growing trend toward increased scrutiny of executive compensation and related-party transactions. State attorneys general, congressional oversight committees, and the IRS are all playing more active roles in policing nonprofit governance, driven by concerns about income inequality, transparency, and the misuse of tax-exempt status. For ATEOs, this means that compliance with Section 4960 is no longer optional but a critical component of overall governance and risk management.

The transition relief provided in Notice 2026-36 offers a temporary reprieve, but organizations must use this time wisely to adapt to the new regulatory landscape. The IRS’s enforcement posture is unlikely to soften, and the stakes for noncompliance are high, with potential excise tax liabilities, reputational damage, and increased scrutiny from regulators. Practitioners and ATEOs alike must approach this challenge with a proactive and strategic mindset, ensuring that their compensation structures are not only compliant with Section 4960 but also aligned with the broader principles of good governance and transparency.