Inflation Reduction Act Credit Transferability Final Regulations Released

calendar iconMay 6, 2024

On April 25, 2024, the U.S. Treasury released final regulations, IR-2024-120, covering rules related to the ability to sell and transfer credits under the Inflation Reduction Act (IRA) found in Internal Revenue Code Section 6417. This new rule substantially changes the way certain federal tax credits can now be monetized and has created quite a stir in the tax world.

The first quarter of 2024 saw a flurry of activity as new markets were created that allowed taxpayers with qualifying investments to quickly monetize a portion of their expenditures. Meanwhile, the buyers of these tax credits have found a sizable opportunity to arbitrage their federal tax liabilities and reduce costs and cash outlays.

The new regulations did not contain any major surprises or substantial changes from the proposed regulations that were promulgated last year. In actuality, the agency took the opportunity to respond to the many comments to explain why it stayed consistent in its approach to several contentious items.

The Internal Revenue Services (IRS) highlighted two areas where it declined to make any changes:

  • The IRS chose not to alter its rule that bonus credits should be allowed to be separated from the underlying base credit for sale. Thus, while credits can be sold in part, the additional bonus credit amounts from enhancers like domestic content and energy communities cannot be separately cleaved off and sold.
  • The IRS made it clear it would not change the rule that places recapture risk on the buyer of the credits. That is, tax credit buyers are still subject to having their credits taken back, if an ownership change in the tax credit-producing assets occurs for the seller during the five-year recapture period.

Other areas in which the IRS provided additional commentary while maintaining the proposed rules include:

  • Comments that transferee taxpayers may secure loans and other funding via an eligible credit purchase and sale agreement provided that the loan(s) are treated as loans for federal tax purposes and transacted at arm’s length. This clarification also reiterated that cash payments may not be made prior to the tax year in which a credit is determined, including production tax credits.
  • Confirmation that the recapture of tax credits for a tax credit buyer will not occur in certain sales of partnership interests and that disposing partner retains the recapture liability.
  • Additional affirmation that individuals, S corporations, and other entities subject to the Section 469 passive activity rules are limited to their use of tax credits only against passive activity income.

This area of opportunity continues to remain complex and fluid. Many organizations are beginning to consider whether they will make estimated tax payments in anticipation of purchasing tax credits.

Your Guide Forward

Cherry Bekaert is excited about the advantageous tax-saving opportunities the IRA regulations and tax credit transferability provide for taxpayers. However, we also strongly suggest you work with a trusted advisor to navigate this new regime. We have deep experience in helping our clients generate maximum savings under these and other incentives.

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