767.02 / What are the rules governing the transferability of certain eligible tax credits under the Inflation Reduction Act of 2022?

Under the Inflation Reduction Act of 2022 (the IRA), eligible taxpayers are entitled to transfer certain green energy tax credits in exchange for cash payments. Under IRC Section 6418, eligible taxpayers are permitted to transfer either the entire value of an eligible tax credit or a portion of the tax credit to unrelated taxpayers. “Eligible taxpayers” include any taxpayers other than tax-exempt organizations, a State or political subdivision thereof, the Tennessee Valley Authority, an Indian tribal government, an Alaska Native Corporation, or a corporation operating on a cooperative basis engaged in furnishing electric energy to parties in rural areas.

Credits that can be transferred under the IRA include: (1) the Alternative Fuel Vehicle Refueling Property credit (IRC Section 30C), (2) the Renewable Energy Production credit (IRC Section 45), (3) the Carbon Oxide Sequestration credit (IRC Section 45Q), (4) the Zero-Emission credit, (5) the Nuclear Power Production credit (IRC Section 45U), (6) the Clean Hydrogen Production credit (IRC Section 45V), (7) the credit for Qualified Commercial Vehicles (IRC Section 45W), (8) the Advanced Manufacturing Production credit (IRC Section 45X), (9) the Clean Electricity Production credit (IRC Section 45Y), (10) the Clean Fuel Production credit (IRC Section 45Z), (11) the Energy Investment credit (IRC Section 48), (12) the Qualifying Advanced Energy Investment credit (IRC Section 48C) and (13) the Clean Electricity Investment credit (IRC Section 48E).

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Planning Point: Because the previously existing rules required complex tax, legal and accounting planning (which, of course, generated substantial costs), many investors avoided engaging in these credit transfer transactions. The new transfer provisions are designed to provide an alternative to allow developers to attract investors and capital with the goal of generating additional funds to expand clean technology production. The direct transfer provisions could also be beneficial to smaller or mid-sized project developers.

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Under IRC Section 6418, taxpayers can elect to transfer all or a portion of eligible tax credits. Under IRS proposed regulations,¹ taxpayers must transfer the base credit and any bonus credits together (using proportionate shares in cases involving partial transfers).

All consideration for the transfer must be paid in cash. IRS proposed regulations provide a safe harbor rule so that the cash requirement will not be violated if the payment is made within the period that begins on the first day of the taxpayer’s tax year when the eligible credit is determined and ends on the due date for the transfer election statement. Taxpayers are entitled to contract in advance for selling the credits, as long as the cash payment is actually made during the safe harbor period.

Amounts received on the sale of eligible tax credits are not taxable income to the taxpayer selling the credit. The credit’s purchaser likewise is not able to deduct amounts paid for the tax credit. Buyers who pay less than the credit’s value do not include the “profit” in their gross income. While the buyer does not have to apply certain rules that apply in determining the credit (such as the at-risk rules), it is required to apply rules that apply based on the taxpayer’s circumstances (for example, the passive activity rules).

Each tax credit (or portion thereof) can only be transferred one time (subsequent transfers by the purchaser are not permitted).

If the credit is held by a partnership or S corporation, the election is made at the entity level and the amount received is treated as tax-exempt income for purposes of IRC Sections 705 and 1366. The partner’s distributive share of the tax-exempt income is based on the partner’s distributive share of the otherwise eligible credit for each tax year.

An election to claim the credit must be made by the due date (including extensions) of the tax return for the tax year in which the tax credit is determined. The election itself is irrevocable.

Once transferred, the credits are subject to a three-year carryback and 22-year carryforward.