717.761.7171

IRS Finalizes Energy Tax Credit Transferability Regulations

IRS Finalizes Energy Tax Credit Transferability Regulations

The Internal Revenue Service (IRS) and the Treasury Department issued final regulations concerning the transfer of tax credits related to clean energy manufacturing, investment and production under Section 6418. These regulations, effective July 1, 2024, provide detailed guidelines for partnerships and S corporations. The primary objective of these rules is to boost investment in clean energy technologies by facilitating the transfer of tax incentives between project developers and investors.

Background

The Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act allowed taxpayers to take advantage of energy tax credits through elective pay or transfer provisions for tax years starting after December 31, 2022. Eligible taxpayers can opt to transfer all or a portion of their credits to unrelated taxpayers for cash. The unrelated taxpayers are then able to claim the transferred credits on their tax returns. The cash payments are not included in the gross income of the eligible taxpayers and are not deductible by the unrelated taxpayer.

Guidance on Eligible Energy Tax Credits

A taxpayer can transfer all or any portion of the eligible tax credits but cannot sever the bonus credit from the base credit and transfer them separately. The following 12 tax credits are eligible:

  1. Energy Credit (determined under Section 48)
  2. Clean Electricity Investment Credit
  3. Renewable Electricity Production Credit
  4. Clean Electricity Production Credit
  5. Zero-emission Nuclear Power Production Credit
  6. Advanced Manufacturing Production Credit
  7. Clean Hydrogen Production Credit
  8. Clean Fuel Production Credit
  9. Carbon Oxide Sequestration Credit
  10. Credit for Alternative Fuel Vehicle Refueling/ Recharging Property
  11.  Advanced Energy Project Credit
  12. Commercial Clean Vehicle Credit

The final regulations state that a partnership that has not elected to be treated as an applicable payer for the direct pay election can qualify as an eligible taxpayer for a transfer election. Businesses can also choose elective pay for a five-year period for three of the eligible credits: those for advanced manufacturing (45X), carbon oxide sequestration (45Q) and clean hydrogen (45V).

Additional Rules for Partnerships or S Corporations

A partnership or S corporation may qualify as a transferor or transferee under the final regulations. The amount of eligible credit determined by a transferor partnership or S corporation may be limited by Section 49 (at-risk rules). The cash payment would be treated as tax-exempt income and is not treated as passive income to any partners or shareholders who do not materially participate.

Making a Transfer Election

The transfer election must be submitted on the originally filed return by the extended due date. Eligible taxpayers have the opportunity to rectify any errors or omissions by filing a superseding return until the extended due date. A taxpayer can make multiple transfer elections for an eligible credit, as long as the aggregate amount does not exceed the amount of the eligible credit. If an eligible taxpayer is a grantor or any other person that is treated as the owner of any portion of a trust under Section 671, then they can make a transfer election under the final regulations.

The finalized regulations retain the rule in the proposed regulations, requiring that the transfer must be made for cash. This includes payments such as cash payments, checks, cashier’s checks, money orders, wire transfers, ACH transfers or other forms of bank transfers involving immediately available funds.

Pre-filing Registration

To aid taxpayers in transferring clean energy credits or obtaining direct payments for energy credits or CHIPS credits, the IRS has developed an Energy Credits Online (ECO) portal. Through the portal, taxpayers can complete the pre-file registration process and receive a registration number. This registration number must be included in the taxpayer’s annual return when opting for a transfer or elective payment for a clean energy credit. The registration process helps deter improper payments to fraudulent entities and provides the IRS with basic information, ensuring that qualifying taxpayers for these credit monetization mechanisms can access these benefits while filing a return and making an election.

If you have any questions regarding transferring energy tax credits, please contact a Brown Plus advisor.

Posted In: Tax | Insights

About the Author - Carrie Small, CPA, MST

Carrie is a Tax Principal at Brown Plus. She has over 20 years of experience providing tax compliance and consulting services to privately held and public companies, with a specialization in insurance taxation.

Carrie is a leader within the Brown Plus Insurance Practice, which provides a full range of audit, tax and advisory services to insurance companies across the country. The Brown Plus Insurance Practice is one of the nation’s largest audit practices as ranked by AM Best. Within the practice, Carrie specializes in providing tax compliance, tax provision and tax consulting services to insurance entities.

Disclaimer: Information provided by Brown Plus as part of this blog post is intended for reference and information only. As the information is designed solely to provide guidance and is not intended to be a substitute for someone seeking personalized professional advice based on specific factual situations, responding to such inquiries does NOT create a professional relationship between Brown Plus and the reader and should not be interpreted as such. Although Brown Plus has made every reasonable effort to ensure that the information provided is accurate, Brown Plus makes no warranties, expressed or implied, on the information provided. The reader accepts the information as is and assumes all responsibility for the use of such information.