The IRS has issued proposed regulations and FAQs addressing the new provision under the Inflation Reduction Act of 2022 that allows business taxpayers to elect to transfer various business energy credits for cash to an unrelated taxpayer beginning with the 2023 tax year. (IRC §6418) Taxpayers can rely on these proposed regulations prior to the adoption of the final regulations.
These provisions allow taxpayers who meet the requirements to monetize these credits quickly by selling them. After the transfer, the transferee is treated as the “taxpayer” with respect to the credit(s) transferred. The transferor will not recognize income from these sales, nor can the purchaser deduct this expense.
The credits that may be transferred include, but are not limited to, the:
- IRC §45 Renewable Electricity Production Tax Credit;
- IRC §45Y Clean Electricity Production Tax Credit;
- IRC §48 Energy Investment Credit (often referred to as the business solar credit); and
- IRC §45D Clean Electricity Investment Credit.
Taxpayers cannot transfer the Clean Energy Vehicle Credit or the Commercial Clean Vehicle Credit.
The over 100 pages of proposed regulations and FAQs provide extensive details concerning this new transfer provision, including:
- Specifying who is and isn’t eligible to transfer credits;
- Determining how much credit can be transferred;
- Clarifying that partial transfers are allowed, enabling transferors to transfer credits to multiple parties;
- Addressing the tax treatment of various aspects of these transactions for both the transferor and transferee as well as identifying the outstanding open questions in this area;
- Requiring taxpayers to complete an electronic prefiling registration with the IRS prior to the transfer of the credit;
- Specifying how the election is made, the impacts of the election, and the type of documentation that both the transferor and transferee must provide with their returns to support the election;
- Providing special rules for transfers involving S corporations and partnerships;
- Clarifying carrybacks and carryforwards of transferred credits; and
- Outlining who is financially responsible for credit recaptures and the consequences of excessive credit transfers.
We will cover this new provision extensively in upcoming issues of Spidell’s Federal Taxletter and the next session of Spidell’s Quarterly Tax Update webinar.
The proposed regulations are available at:
https://public-inspection.federalregister.gov/2023-12799.pdf
The IRS FAQs are available at:
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