Inflation Reduction Act Update: Learn the Tax Credit Transferability Rules

The Inflation Reduction Act (IRA) significantly expanded available clean energy tax credits, including introducing a transferability system to sell energy credits.

Last month, the IRS issued final regulations on the transferability system, which is generally open to individuals, corporations, partnerships, and certain trusts. Learn what you need to know to potentially take advantage of this lucrative opportunity.

Key provisions of the IRA’s transferability system

Original return requirement

Under the final regulations, transfer elections must still be made on an original or superseding return filed before the original or extended due date. Transfer elections cannot be made (or withdrawn) on an amended return, through a partnership administrative request under Section 6227, or via request for private letter ruling.

Despite this restriction, the final regulations changed some rules taxpayers may find helpful:

• Taxpayers can file an amended return or Section 6227 administrative request to correct a numerical error made on an otherwise timely filed transfer election. Though taxpayers cannot correct an item that is blank or described as being “available upon request.”
• Taxpayers who did not file an extension and timely filed their original returns without the transfer election may be eligible for late-election relief. Taxpayers can take corrective action by filing a transfer election on an amended return with “filed pursuant to Section 301.9100-2” marked at the top of the document. The amended return must be filed within six months of the original due date of the return.
• Similar rules apply to S corporations and partnerships making transfer elections.

Estimated tax payments

The final regulations don’t say when a transferee can start taking an eligible credit into account for estimated tax purposes. The regulations’ preamble says a transferee can “take into account the eligible credit for purposes of determining its quarterly estimated tax liability no earlier than an eligible taxpayer would.”

The regulations also verify transferees who plan to complete eligible credit purchases don’t need to wait until all Section 6418 election requirements are fulfilled to begin including credits in estimated tax payment computations.

Although not free from doubt, there seems to be authority allowing transferees to account for eligible credits during estimated tax payment periods where qualified expenditures are paid or incurred. A more practical approach — and one appearing to be the industry standard so far — is for transferees to begin taking eligible credits against estimated tax payments once a binding credit purchase agreement is signed.

Regardless of the approach, transferees remain liable for additions to tax under Sections 6654 and 6655 to the extent they have estimated tax underpayment.

Other provisions, clarifications, and confirmations

General IRA energy tax credit rules and definitions

• Grantor trust owners can elect to transfer eligible credit property held by such trust.
• Partnerships that have not elected to receive Section 6417 refunds from the IRS of the Section 45Q, Section 45V, or Section 45X credits can qualify as eligible taxpayers under Section 6418.
• Partnerships with tax-exempt or government entity partners can sell energy investment tax credits in their entirety but are subject to standard credit reduction rules applicable to property used by tax-exempt organizations and governmental units.
• Taxpayers with Section 48 investment tax credits from energy storage technology property may qualify to sell such credits even though such property does not generate electricity.
• Transferees cannot make advance cash payments (i.e., purchases) to eligible taxpayers for tax credits before the year the credits are allowed.
• Eligible taxpayers are not prohibited from using eligible credits as security in support of a loan made by the transferee or third-party lender. The loan must be underwritten on arm’s length terms and treated as debt for federal income tax purposes.

Rules for making credit transfer elections

• Taxpayers cannot make “horizontal” credit transfers; that is, sever and sell separately base credits or different types of bonus credits. Only “vertical” credit transfers are permitted, which involves transferring all or a proportionate share of the entire tax credit.
• The Section 45X credit is the only credit eligible for transfer not requiring taxpayers to own the eligible credit property.
• The registration number assigned by the IRS to eligible credit property during the pre-filing registration must be included on the relevant credit source form.
• Brokers and other intermediaries purchasing eligible credits where a transfer election is made by the eligible taxpayer cannot sell the credits to another party.
• Brokers receiving remuneration for providing liquidity, facilitating transactions, etc. cannot exclude such amounts from gross income under Section 6418.
• The transferee of an eligible credit must take an eligible credit into account in its tax year ending with or after the eligible taxpayer’s tax year where the credit was determined. For example, if a transferee using a June 30 year-end purchases an eligible credit from a calendar-year-eligible taxpayer in November 2024, the transferee cannot take the credit on its return until its tax year ends on June 30, 2025.
• The Section 469 passive activity loss rules apply to the transferee unless the transferee materially participates in the business generating the credit.
• An eligible credit transferee that is also an applicable entity (e.g., Section 501(c) entity, state, or local government, etc.) cannot seek a Section 6417 refund. This is known as the anti-chaining rule.

Credit transfer rules for partnerships and S corporations

• An upper-tier partnership’s share of a lower-tier partnership’s transferred eligible credit is an extraordinary item to the upper-tier partnership. The share of the eligible credit must be allocated to the partners of the upper-tier partnership at the time the credit is transferred by the lower-tier partnership.

Clean energy tax credit registration

• When the IRS does not issue a registration number to a taxpayer, the taxpayer cannot appeal the denial unless the IRS Independent Office of Appeals agrees to review the case.
• A taxpayer’s authorized representative can register the eligible taxpayer’s credits with the IRS.

Special rules

• A taxpayer or transferee can petition the U.S. Tax Court (or other relevant court) to challenge an IRS determination that excess credits have been transferred if the determination creates a tax deficiency.
• A transferee can’t deduct amounts paid to a taxpayer for excess credits (i.e., credits determined as ineligible for sale).
• Tax credit recapture liability applies proportionately to all transferees, except in limited situations involving the transfer of a partnership interest by a partner or S corporation stock by an S corporation shareholder.
• A credit transfer unwound because it’s found to be ineffective doesn’t prevent the credit from being transferred in the future.
• Credits owned by a real estate investment trust (REIT) that haven’t been transferred are disregarded for purposes of the REIT asset test.
• Cash received by a REIT from selling credits is excluded from gross income and is not subject to the prohibited transaction tax.

Credit transfer transaction cost treatment

• The final regulations don’t provide guidance on treating transaction costs incurred in connection with selling credits. The IRS advises general tax law principles apply in determining whether transaction costs must capitalized.

How we can help

CLA’s energy tax services team is working with hundreds of organizations on navigating and capturing the IRA benefits, including the ins-and-outs of the complicated transferability system. Reach out to us to learn the rules and how your organization may benefit. Contact Us

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