Let the Transfer Games Begin

On June 14, Treasury and the Internal Revenue Service (IRS) released much anticipated guidance on the transfer of certain credits in the form of proposed regulations.

The Inflation Reduction Act introduced a brand-new transferability feature for eleven (11) eligible credits. The eleven (11) eligible credits include:

• Alternative fuel vehicle refueling property credits (section 30C);
• Renewable electricity production credits (production tax credits/PTCs) (section 45(a));
• Carbon oxide sequestration credits (section 45Q(a));
• Zero-emission nuclear power production credits (section 45U(a));
• Clean hydrogen production credits (section 45V(a));
• Advanced manufacturing production credits (section 45X(a));
• Clean electricity production credits (section 45Y(a));
• Clean fuel production credits (section 45Z(a));
• Energy credits (investment tax credits/ITCs) (section 48);
• Qualifying advanced energy project credits (section 48C); and
• Clean electricity investment credits (section 48E). 

Transferability permits an eligible taxpayer (any taxpayer that is not a tax-exempt organization, a State or political subdivision thereof, Tennessee Valley Authority, an Indian tribal government, an Alaska Native Corporation, or rural electric cooperatives) to sell all or a portion of an eligible credit to an unrelated party for cash. The cash amount received by the credit transferor in connection with the credit transfer is not includable in gross income and the amount paid for the eligible credit is not deductible by the transferee who purchased the eligible credit.

Transferability could reduce the complexity involved in monetizing one of these eligible credits through various tax equity structures by simply allowing a buyer with enough tax “appetite” to purchase an eligible credit directly without otherwise acquiring a long-term ownership stake in a project. However, transferability fails to monetize a project’s depreciation benefits and the price a buyer would be willing to pay under this structure may not necessarily result in a better value for the sponsor than tax equity financing.

What They are Saying

Transfer of Certain Credits Proposed Regulations

The proposed regulations provide guidance for elections to transfer eligible credits, special rules for partnerships and S corporations, pre-filing requirements with the IRS and rules regarding excessive credit transfers, basis reduction, recapture and carryforward and carryback. 

The proposed regulations include a comment period until August 14, 2023, and a proposed public hearing scheduled for August 23, 2023, at 10 a.m. EDT.

Highlights from the proposed regulations include:

• An eligible taxpayer cannot separately transfer the base credit amount from bonus credit amounts (example, bonus credit from the facility locating in an energy community). An eligible taxpayer may transfer all of an eligible credit or a portion thereof, which includes a proportionate share of the base credit amount and all bonus credit amounts.
• Clarifies what is paid in cash, the timing on making such cash payment, safe harbor timing rule as to when a payment does not violate paid in cash requirement, and whether advance contractual purchase commitments violate the paid in cash rule. If any amount other than cash is received, the transfer election is completely disallowed.
• Confirms that once made, the transfer election is irrevocable.
• Eligible taxpayer may make multiple transfer elections transferring eligible credits to more than one transferee so long as no more than the total eligible credit is transferred.
• No transfer election can be made if the eligible credits are determined based on progress expenditures.
• If a carbon sequestration credit is allowed to the person that disposes, utilizes or uses the carbon oxide as a tertiary injectant, the section 45Q is not transferrable. Similarly, if the section 48 ITC credit is passed through to the lessee, that ITC is not transferrable.
• Transfer election must be made on an original return and cannot be revised on an amended return or if a partnership, through the administrative adjustment request. Additionally, there is 9100 relief for a late transfer election.
• Provides rules regarding the mandatory registration process, including eligible taxpayers registering before the filing, the return on which the transfer election is made and pre-filing registration requirements.
• Provides rules regarding the excessive credit transfer imposing a tax on the transferee equal to the amount of excess credit transfer plus a penalty equal to 20% of the excess credit transfer subject to reasonable cause.
• Clarification that the transferee bears the burden of recapture and that the recapture amount is taken into account by the transferee.

What They are Saying

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