The Internal Revenue Service (IRS) recently unveiled proposed regulations aimed at establishing clear procedures and rules for eligible taxpayers to transfer or sell clean energy tax credits under the Inflation Reduction Act of 2022.
The proposed regulations introduce an IRS pre-registration process for credit transfers, outlining the necessary steps and requirements for eligible credit transfers and the election to transfer credits. Simultaneously, temporary regulations have been issued, mandating taxpayers intending to transfer credits to register via an IRS electronic portal before filing their tax return. This registration process applies to both taxpayers opting to transfer credits and entities choosing direct payment, with separate proposed rules addressing elective payment guidance.
The introduction of transferable credit provisions under the Inflation Reduction Act aims to simplify project structuring compared to traditional tax-equity models. This change enables a more efficient market for utilizing available tax credits. Before the enactment of the Inflation Reduction Act (IRA), tax-equity structures posed significant challenges for many developers due to their complexity and high costs.
The transferable credit market provided by the IRA offers credit sellers a wider range of capital options to support their project financing needs. Conversely, credit buyers can now contribute essential funding to renewable energy initiatives by acquiring discounted tax credits. Let’s consider an alternative scenario: Suppose a renewable energy project has a $50 million tax credit available for transfer, and a credit buyer purchases it at a rate of $0.85 per $1.00 of value. In this case, the developer would receive $42.5 million in capital, while the buyer would enjoy tax savings, not including any associated transaction expenses or limitations on attribute usage.
Who Can Transfer Clean Energy Tax Credits?
The proposed rules allow qualifying taxpayers to choose, within a particular tax year, to transfer a defined portion of a qualifying credit associated with eligible credit property owned by the transferring taxpayer. Typically, eligible taxpayers are individuals who do not meet the criteria to be considered applicable taxpayers for voluntary payment as outlined in Section 6417.
The term “eligible credit” is defined in Section 6418 and encompasses 11 specified credits. According to the proposed regulations, the entire amount of any eligible credit is determined separately for each of the taxpayer’s single eligible credit properties, including bonus credit amounts for each property.
When a transferee taxpayer compensates an eligible taxpayer for the transfer of a qualifying credit, the payment must be in the form of cash. Cash is defined as payment made in U.S. dollars through different methods, such as cash, check, wire transfer, or other bank transfers. Moreover, if there is a contractual agreement to buy eligible credits beforehand, it can fulfill the condition of being “paid in cash” as long as the cash payments are completed within the specified timeframe.
What are the Criteria and Guidelines for Making Transfer Elections of Clean Energy Tax Credits?
The proposed regulations outline the criteria for making transfer elections, which include guidelines on how and when the elections should be made, permitted and restricted periods for making such elections, and additional clarifications that are deemed necessary.
As per the proposed rules, an eligible taxpayer can make transfer elections without any restriction on the number of elections or transferee taxpayers involved. However, it is important to note that the transfer of a specific portion of the credit should not exceed the total eligible credit that can be transferred.
Specific guidelines are provided for different entities regarding election processes, such as disregarded entities, consolidated groups, partnerships, and S corporations. Additionally, eligible taxpayers are generally required to make an election for a single eligible credit property based on the proportionate share of each bonus credit amount included in the overall eligible credit calculation.
In conclusion, the proposed regulations introduced by the IRS for transferable clean energy tax credits under the Inflation Reduction Act of 2022 aim to streamline project structuring and provide clear procedures for eligible taxpayers. The regulations include an IRS pre-registration process, temporary regulations for credit transfers, and separate rules for elective payment guidance. The introduction of the transferable credit market under the IRA offers credit sellers more options for project financing, while credit buyers can contribute vital funding to renewable energy initiatives. These regulations provide flexibility in the number of transfer elections and transferee taxpayers, as long as the transfer does not exceed the available eligible credit. Overall, these proposed regulations facilitate a more efficient market for utilizing tax credits and simplify the process for eligible taxpayers and entities involved in credit transfers.
Article by Muhammad Junaid, Senior Tax Manager
