Capitalizing on Elective Pay and Transferability of Tax Credits Under the Inflation Reduction Act
The Inflation Reduction Act (IRA) provided two new mechanisms to facilitate the utilization of certain clean energy tax credits that were authorized and expanded by the IRA. These mechanisms were elective pay, which enables tax-exempt entities to directly use and monetize federal tax credits related to their investment in clean energy projects, and transferability, which allows tax-paying entities the ability to sell their clean energy tax credits to other tax-paying entities.
On June 16, 2023, the Treasury Department released REG-101607-23 and REG-101610-23. Which proposed regulations to establish rules and guidance for tax-exempt entities to take advantage of elective pay under Section 6417 and transferability provisions under Section 6418.
Elective Payment of Applicable Credits
Section 6417 allows certain tax-exempt entities to utilize the federal tax clean energy credits authorized by treating these credits as direct cash payment of income tax as opposed to a non- refundable credit. This provides a way for the federal government to help fund clean energy projects.
The applicable entities are that eligible to use elective payment provision include U.S. territorial governments, state and local governments, Indian Tribal governments, rural electric cooperatives, The Tennessee Valley Authority and many other tax-exempt organizations. The tax-exempt organizations that qualify include public charities, private foundations, business leagues, labor organizations and others that are designated as Section 501(c) organizations.
Eligible Energy Credits
The energy tax credits available under the elective payment provisions include, but are not limited to, the following credits:
- Section 45(a) Renewable Electricity Production Credit
- Section 48 Energy Credit
- Section 45X(a) Advanced Manufacturing Production Credit
- Section 45 (c ) Qualifying Advanced Energy Project Credit
- Section 45W Qualified Commercial Vehicle Credit
Claiming Elective Payment
Tax-paying entities that claim some energy tax credits may also make an election to claim those credits as direct payment. These electing taxpayers may claim the credit for carbon dioxide sequestration under Section 45Q, the credit to produce clean hydrogen under Section 45V and the advanced manufacturing production credit under Section 45X as a direct payment of income tax liability. Special rules apply to S Corps and partnerships that make the election for these credits in how they are treated by both the entity and the shareholder or partner.
The elective pay provisions are available for tax years ending after December 31, 2022, and are claimed on the income tax return that claims the underlying credit. Eligible entities may also benefit by pre-filing registration which is required for all entities that intend to make this election.
Transferability of Applicable Credits
Section 6418 allows certain taxpayers to transfer tax credits to unrelated parties for cash. Eligible taxpayers are not an applicable entity. Any taxpayer that is not an applicable entity, as listed in quarter one, can elect to transfer (sell) all or a portion of the eligible credits as determined under Section 6417.
The amount of eligible credits that can be transferred is impacted by bonuses or other requirements, including prevailing wage and apprenticeship requirements, domestic content bonuses, energy communities bonuses, and low-income communities bonuses.
Transferring Applicable Credits
To transfer eligible credits, taxpayers will need to complete a project that generates an eligible credit and completes electronic pre-filing registration with the IRS. Taxpayers can arrange to transfer an eligible tax credit to an unrelated party in exchange for only cash. The tax return indicates the eligible credit has been transferred to a third party and the transfer election statement and other information as required by guidance. This must include the registration number for the relevant eligible credit property.
Claiming Transferred Credits
To claim transferred credits, a taxpayer must arrange to purchase an eligible credit from an unrelated party in exchange for only cash. Once the taxpayer has obtained all necessary information to claim the eligible credit transferred, they should file a tax return for the taxable year. The tax return must include the registration number for the relevant eligible credit property.
Eligible taxpayers may transfer all or a portion of an eligible credit generated from a single eligible credit property. They may also sell an eligible credit generated from a single eligible credit property to multiple unrelated parties in the same tax year.
For transferred eligible credits under Section 48, Section 48E, Section 48C or Section 45Q, the transferee bears the financial responsibility for a recapture event and is required to recapture an amount of previously claimed tax credits based on the timing and amount of the recapture event. The transferor is required to notify the transferee if a recapture event occurs. For other eligible credits, recapture is not relevant.
Energy Tax Credits Eligible for Direct Pay and Transferability
See below for which energy tax credits are eligible for direct pay and transferability:
|Energy Tax Credit||Direct Pay||Transferability1|
|Section 25E Previously Owned Clean Vehicles||No; but, see special rule for advanced payments on transfer under Transferability.||No; but, taxpayer who purchases a pre-owned clean vehicle can elect, on or before the purchase date, to transfer the credit to the dealer who sold the vehicle in exchange for cash, or a partial payment or a down payment on the vehicle in an amount equal to the credit otherwise available to the buyer.|
|Section 30C Alternative Fuel Vehicle Refueling Property Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 30D Clean Vehicle Credit||No; but, see special rule for advanced payments on transfer under Transferability.||No; but, taxpayer who purchases a new clean vehicle can elect, on or before the purchase date, to transfer the credit to the dealer who sold the vehicle in exchange for cash, or a partial payment or a down payment on the vehicle in an amount equal to the credit otherwise available to the buyer.|
|Section 45 Renewable Electricity Production Tax Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 45Q Carbon Oxide Sequestration Credit||Yes; not limited to tax-exempt and state governmental entities during first five years of the credit period.||Yes|
|Section 45U Zero-Emission Nuclear Power Production Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 45V Clean Hydrogen Production Credit||Yes; not limited to tax-exempt and state governmental entities during first five years of the credit period||Yes|
|Section 45W Qualified Commercial Vehicles for a Tax-Exempt Entity||Yes; but limited to tax-exempt entities.||No|
|Section 45X Advanced Manufacturing Production Credit||Yes; not limited to tax-exempt and state governmental entities during for any consecutive five-year period elected by taxpayer within the credit period.||Yes|
|Section 45Y Electricity Production Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 45Z Clean Fuel Production Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 48 Energy Investment Tax Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 48C Qualifying Advanced Energy Project Credit||Yes; but limited to tax-exempt entities.||Yes|
|Section 48E Clean Electricity Investment Credit||Yes; but limited to tax-exempt entities.||Yes|
1Tax-exempt entities are excluded from using transferability.
To learn more about how your business is able to take advantage of transferability and elective pay, reach out to a member of Cherry Bekaert’s Energy Tax Credits team.
- IRS Notice 2023-38: Boosting Clean Energy Credits for Domestic Content in New Facilities
- Notice 2022-61: Initial Guidance on Prevailing Wage and Apprenticeship Requirements for IRA Clean Energy Tax Credits
- How New Prevailing Wage and Apprenticeship Requirements Impact the Real Estate & Construction Industry
- CHIPS Act Deep Dive Part 5: New Ways to Monetize Energy Tax Credits for the Industrial Industry
- Inflation Reduction Act of 2022: Key Income Tax Provisions