IRS Unleashes New Era for Green Projects: How to Capitalize on Transferable Tax Credits
The Treasury Department recently released the much-anticipated proposed regulations regarding transferring tax credits for certain clean energy projects under the Inflation Reduction Act (“IRA:”) passed last summer. With the IRA, a new transferability and direct pay option was created to enhance investments in clean energy projects. In addition, there is now a registration process designed to prevent fraud, duplication, and excessive payments from occurring.
According to the IRA, the following tax credits are available for transferability:
- Section 30C – Alternative Fuel/EV Charger Credit
- Section 45/45Y – Production Tax Credit
- Section 45Q – Tax Credit for Carbon Sequestration
- Section 45U – Nuclear Power Production Credit
- Section 45V – Clean Hydrogen Production Credit
- Section 45X – Advance Manufacturing Production Credit
- Section 45Z – Clean Fuel Production Credit
- Section 48/48E – Investment Tax Credit
- Section 48C – Advanced Manufacturing Tax Credit
How to Elect the Transfer of Tax Credits
Eligible taxpayers under this statute include any entities subject to U.S. tax. Taxpayers who make a transfer election must complete a pre-filing registration through an online portal from the Internal Revenue Service. According to the registration process, the taxpayer will have to provide certain information, such as the address of the project, including the longitude and latitude for each project, and the amount of tax credits being transferred. Upon completing the registration, the taxpayer will receive a registration number for each eligible property. This registration number must be included in both the transferor’s and transferee’s tax returns in the tax year of the transfer. The IRS could ask for additional information on the portal once it is up and running.
If the proposed regulations are finalized, the purchaser will be required to pay for the tax credits in cash, check, cashier’s check, wire transfer, or ACH transfer. Cash payments received by the developer for transferring the tax credit are not considered income, nor are the payments made by the purchaser treated as a deductible expense. Legal agreements between the solar developers and purchasers will need to be drafted in connection with the transfers.
If an applicable clean energy investment under Section 48, 48C, or 48E is disposed of that was part of the transfer of the ITC before the end of the recapture period, then certain notification requirements apply. The developer must notify the purchaser of the recapture event and the recapture amount to be included in the purchaser’s annual tax filing. In the event of a pass-through entity, the individual partner or shareholder retains the recapture exposure.