Transferable Energy Tax Credits Would Require Registration, Valid Election Under IRS Proposed Rules

The IRS on June 14 issued proposed regulations that would set out procedures and rules for eligible taxpayers to transfer, or sell, clean energy tax credits under the Inflation Reduction Act of 2022.

The proposed regulations outline a required IRS pre-registration process for transferring credits and address the requirements for eligible credit transfers and making a valid election to transfer credits, among other rules.

Concurrently issued temporary regulations on the registration process require taxpayers planning to transfer credits to register through an IRS electronic portal before filing the return on which they make an election to transfer credits under Section 6418. The required pre-registration process applies to taxpayers electing to transfer credits and to entities electing direct payment. Elective payment – available for applicable taxpayers (generally tax-exempt entities) – allows for direct pay in lieu of a credit; separate proposed rules address elective payment guidance.

The Inflation Reduction Act’s transferable credit provisions are intended to simplify project structuring in comparison to traditional tax-equity. In addition, the transferable credits create a more efficient market for the utilization of available tax credits. Prior to the Inflation Reduction Act (IRA), tax-equity was a limited option to many developers given the expense and complexity associated with setting up a tax-equity structure.

For credit sellers, the IRA’s new transferable credit market democratizes access to capital needed to successfully finance a project. For credit buyers, the transferable credit market creates an opportunity to provide needed capital to a renewable based project in exchange for discounted tax credits. For example, a $100 million tax credit transferred at $0.92 per $1.00 of value provides $92 million of capital to a developer and $8 million of cash tax savings to a buyer – barring transaction costs and attribute usage limitations.

Eligible Credit Transfers

The proposed rules would permit eligible taxpayers to make an election in a tax year to transfer to another taxpayer any specified portion of an eligible credit with respect to eligible credit property held by the transferring taxpayer. Eligible taxpayers are generally those that do not qualify as applicable taxpayers for elective payment under Section 6417.

“Eligible credit” is defined in Section 6418 and includes 11 listed credits. The proposed regulations would specify that the entire amount of any eligible credit is separately determined with respect to each of a taxpayer’s single eligible credit properties and would include bonus credit amounts for each property. Special rules would apply for specific eligible credits, including:

Section 45 credit – Taxpayers would have to register and make elections on a facility-by-facility basis, with “facility” meaning a qualified facility under Section 45(d).
Section 45X credit – Taxpayers would have to register and make elections on a facility-by-facility basis, with “facility” meaning one that produces eligible components under Section 45X and Section 48C guidance.
Section 45Z credit – Taxpayers would have to register and make elections on a facility-by-facility basis, with “facility” meaning a qualified facility under Section 45Z(d)(4).
Section 48 credit – Taxpayers would have to register and make elections on a property-by-property basis, with “property” meaning an energy property (generally including all functionally interdependent property components).

For purposes of the requirement under Section 6418 that the portion of the transferred credit be specified, the proposed regulations would define “specified credit portion.” The term would generally mean a proportionate share of an entire eligible credit determined with respect to an eligible credit property that the taxpayer specifies in a transfer election. The specified credit portion also would be required to reflect a proportionate share of bonus credit amounts taken into account in calculating the amount of the credit.

Consideration paid by a transferee taxpayer to an eligible taxpayer for the transfer of an eligible credit must be “paid in cash” under Section 6418(b). The proposed regulations define “paid in cash” as a payment made in U.S. dollars – which may be made by cash, check, cashier’s check, money order, wire transfer, ACH transfer or other bank transfer of immediately available funds. In addition, the rules provide that a contractual commitment to purchase eligible credits in advance of the date a specified credit portion is transferred would satisfy the “paid in cash” requirement, as long as the cash payments are made within the time period prescribed in the regulations.

Transfer Election Rules

The proposed regulations set out requirements for making transfer elections, including the manner and due date for elections, when elections can and cannot be made, and other clarifications.

Under the proposed rules, there would be no limit on the number of transfer elections – or transferee taxpayers to which an eligible taxpayer can make a transfer election – as long as the transfer of a specified credit portion does not exceed the eligible credit to be transferred.

Rules would apply with respect to how specific entities make elections:

Disregarded entities – An eligible taxpayer holding the disregarded entity makes the transfer election.
Consolidated groups – Each eligible member of the consolidated group makes the transfer election.
Partnerships and S corporations – The partnership or S corporation, not the partners of shareholders, make the transfer election with respect to any eligible credit property held directly by the partnership of S corporation.

The proposed regulations would generally require eligible taxpayers to make an election to transfer a specified credit portion on the basis of a single eligible credit property. The proportionate share is the proportionate share of each bonus credit amount that is taken into account in calculating the entire amount of the eligible credit. However, the IRS requests comments on whether to adopt a grouping rule that would allow taxpayers to make an election with respect to certain groups of eligible credit properties.

The rules would set out specific requirements for making valid transfer elections, including, for instance, properly completing a relevant source credit form for the eligible credit, properly completing Form 3800 with a registration number, and attaching a schedule to Form 3800 showing the amount of eligible credit transferred.

There is also a requirement for a “transfer election statement,” a written document describing the transfer of a specified credit portion. Such statements would need to provide specified information, including a statement from the eligible taxpayer that it has provided the required minimum documentation to the transferee taxpayer. The proposed rules further specify timing for completing the transfer election statement. Both the transferor and transferee taxpayers generally must attach the transfer election statement to their returns.

With respect to the transferee taxpayer’s treatment of an eligible credit, the proposed regulations specify that there is no gross income to a transferee taxpayer when claiming an eligible credit if the amount paid for the credit is less than the amount of the eligible credit transferred and claimed.

The proposed rules also include guidance on limitations on the transfer election, determining the eligible credit with respect to investment credit property held by a transferor partnership or S corporation, and the treatment of payments made in connection with transfers.

Prefiling Registration

Before filing the return on which a transfer election is made, the proposed regulations would require eligible taxpayers to register and provide information on each eligible credit property for which the taxpayer intends to transfer a specified credit portion.

The registration would have to be completed electronically through an IRS portal. Taxpayers would have to register and receive their registration number before making a transfer election. Registration numbers would be required for each eligible credit property with respect to which a transfer election of a specified credit portion is made. The registration process would require specific information, such as the location of eligible credit properties, supporting documentation, and beginning construction and placed in service dates.

Registration numbers once obtained would be valid only for the tax year for which they were obtained. However, it would be possible to renew the registration numbers. The taxpayer must include the registration number on their return for the tax year for the election to be effective. If the facts change with respect to an already registered eligible credit property, the eligible taxpayer would be required to amend the registration.

Other Special Rules

The proposed regulations would make several other clarifications, including:

For purposes of determining if the reasonable cause exception applies for the 20% penalty related to an excessive credit transfer, reasonable cause generally would be determined based on all the facts and circumstances – with specific factors enumerated in the rules.
For calculating whether there was an excessive credit transfer and its amount, all transferee taxpayers would be considered one transferee.
There is no prohibition against an eligible taxpayer and a transferee taxpayer contracting between themselves to indemnify the transferee taxpayer in the event of a recapture.
In the event of a recapture event, the eligible taxpayer would be required to give notice to the transferee taxpayer.

What’s Next for Transferable Tax Credits

Many taxpayers and clean energy developers are expected to benefit from the IRA’s transferable credit provisions. Despite these advances, to ensure a successful credit transfer transaction, it is important to remember the importance of thorough due diligence, documentation, reporting and seeking appropriate professional advice.

Key Takeaways

The tax benefit of an eligible credit purchased by the buyer for less than face value is excluded from gross income.
Treatment of transaction costs borne by the eligible taxpayer or transferee taxpayer were not addressed in the proposed regulations.
The transferee taxpayer will take the eligible credit into the tax year that ends with or after the tax year of the eligible taxpayer.
Based on a transferee taxpayer’s circumstances, the amount of the eligible credit allowed to be claimed under other sections may be limited by the Section 38 general business credit or Section 469 passive activity rules.
A three-year carryback period is provided under the proposed regulations for certain eligible credits.