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6 May 20246 minute read

Treasury finalizes tax credit transferability regulations: Top points

On April 25, 2024, the Internal Revenue Service and Treasury Department released final regulations relating to the monetization and transferability of certain green energy tax credits (T.D. 9993). Such credits relate to the Inflation Reduction Act, P.L. 117-169 (IRA). That act created IRC Section 6417, allowing eligible taxpayers to elect to treat certain energy credits as tax payments, and Section 6418, allowing eligible taxpayers to transfer those credits to other taxpayers.  

The final regulations discussed herein relate to Section 6418, which applies to the transfer of the following energy credits:

  • Section 30C alternative fuel refueling property credit
  • Section 45(a) renewable electricity production credit
  • Section 45Q carbon oxide sequestration credit
  • Section 45U zero-emission nuclear power production credit
  • Section 45V clean hydrogen production credit
  • Section 45X credit for advanced manufacturing production
  • Section 45Y clean electricity production credit
  • Section 45Z clean fuel production credit
  • Section 48 energy credit
  • Section 48C qualifying advanced energy project credit, and
  • Section 48E clean electricity investment credit.

As a general matter, to purchase any of these credits, the buyer must pay in cash and may not subsequently transfer the credit. Payments received by eligible taxpayers who are selling their credits are not included in the gross income of the eligible seller. 

In the final regulations, the government largely maintained the positions previously provided in June 2023 (please see RIN 1545-BQ63 and RIN 1545-BQ64 as well as DLA Piper’s prior summary of the proposed regulations).

Below, we describe certain updates and clarifications included in the final regulations. We also note a handful of areas in which the government maintained the status quo set forth in the 2023 proposed regulations. The final regulations will be effective July 1, 2024. 

  • No advance cash payments: Like the proposed regulations, the final regulations prohibit advance payments for eligible credits. However, the preamble to the final regulations notes that there is no prohibition on a buyer obtaining a loan secured by a eligible credit purchase and sale agreement, provided the loan was on an arm’s-length basis. However, after stating that, Treasury provided that it is possible that such loans could be treated as upfront payments based on a facts and circumstances analysis, leaving open whether such loans will become adopted by buyers in the market to fund development of projects. 

  • Documentation rules: The final regulations allow taxpayers to correct transfer election errors made on tax returns so long as such action is a correction rather than the first time such information is being provided (ie, if an item was left blank, it cannot later be added). If such changes increase an eligible credit, such increases are not eligible for transfer to the extent not already correctly reflected in the originally filed transfer election statement. The final regulations also confirm that the registration number must be included on both IRS Form 3800 and any required source credit forms.

  • Base and bonus credits must be linked: The final regulations, like the proposed rules, require that taxpayers sell the base tax credit along with any related bonus credits.  Thus, a tax credit buyer cannot structure the purchase of only the base credit or limiting to only certain adders, unless the seller is prohibited from claiming the undesired adders.

  • Entity-level elections for partnerships and S corporations: The final regulations, like the proposed rules, require that a partnership or S corporation’s election to sell credits must be made at the entity level rather than the partner or shareholder level.  In rejecting comments seeking changes to the result, Treasury reiterated that the first dollar loss rule applies to any retained tax credits held by a partnership for an excessive credit transfer, even in the case if only one partner sells their tax credits with the other partner(s) retaining their tax credits. 

  • Recapture: The final regulations provide that if a taxpayer retains part of the credit, any recapture is shared pro rata between the taxpayer and the transferee buyer (as well as between buyers if there are multiple).  Treasury rejected comments asking for the ability to allocate recapture to a specific party to limit the need to calculate recapture for multiple parties and provide notices.

  • Transaction costs: The final regulations do not address the federal income tax treatment of transaction costs incurred in connection with a credit transfer. The preamble states that the government will issue further guidance regarding these costs in the future. 

  • Transfer timing: The final regulations reiterate that a transfer election is not effective until all of the requirements of Treas. Reg. 1.6418-2(b) are fully satisfied. Said differently, under the final regulations, the credit transfer is not perfected until the election has been memorialized on a filed tax return. 

  • Registration: The preamble reiterates that the pre-filing registration is not intended to handle bonus credit eligibility or the amount of the eligible credit.  Instead, it is primarily intended to verify that the applicant is an eligible taxpayer and that the registered property is eligible credit property.  Treasury would not adopt a required timeline for the IRS to review and issue a registration number, and instead referred taxpayers to the registration manual that recommends taxpayers submit their information at least 120 days prior to their intended return filing date.

Please also see DLA Piper’s separate alert regarding the impact of final regulations on real estate investment trusts (REITS).

How DLA Piper can help

DLA Piper can guide companies through the process of claiming and monetizing renewable energy tax credits. Please contact any of the authors of this alert with any questions about this guidance or renewable energy tax credits in general. 

Visit our Clean Energy Tax Credits and Incentives topic hub for related digital events and articles.