Rules and definitions for the transfer and sale of tax credits, which has quickly grown to a multi-billion-dollar market, largely affirm the proposed guidance from last June.
The Internal Revenue Service (IRS) released final guidance for the transfer of clean energy tax credits, a provision within the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) act that allow tax credit owners to sell their credits to other entities with a tax appetite.
Under a tax credit transfer transaction, renewable energy developers and owners are essentially able to sell tax credits for cash, making financing easier for new clean energy projects. The transferability option is generally open to the entities that are not covered by the direct pay option. More information in the frequently asked questions section can be found here.
“The Treasury and IRS’s final rules on transferability bring more certainty to the clean energy credit transfers, which will allow for continued growth in the market,” said Carina Federico, partner, Crowell & Morning. “Many taxpayers who were hesitant to enter the market will be more willing to do so now that the final regulations have been issued.”
The transferability provision addresses current constraints in the nation’s tax equity market, opening a new source of capital for clean energy businesses. The American Council on Renewable Energy (ACORE) said that the IRA’s transferability market alone will fuel $50 billion or more in annual of monetization of tax credits.
The final issued guidance clarified rules and definitions, including specific rules for partnerships and S corporations. The Treasury declined to change some rules related to passive and active tax liabilities for these groups.
Crux, a company operating a tax credit transfer marketplace with over $8 billion of tax credits listed on its platform, said the final guidance “largely affirms last June’s transferability guidance.”
The IRS confirmed in the final guidance that there are no restrictions on the ability of project owners to obtain loans secured by a tax credit sale agreement, either from a tax credit buyer or a third-party lender.
IRS also reiterated that companies must obtain a pre-filing registration number to complete a tax credit transfer.
“While more than 45,000 projects have already submitted pre-registration filings, some commenters noted specific challenges faced by smaller projects — affirming that technology can be a crucial tool to aid in streamlining this process,” said Crux.
Crowell & Morning highlighted some changes under the final issued guidance:
- Treasury and IRS rejected commenters suggestion to allow “base” credits and “bonus” credits to be sold separately and will continue to require the entire credit to be divided in portions that include both the base and bonus credit.
- Project developers cannot sell their “progress expenditures” for Section 48 ITC projects before they have placed their project in service.
- Final rules maintain the paid in cash definition set forth in the proposed regulations. The final rules do not allow for advanced payments for eligible credits prior to the taxable year an eligible credit is determined.
- The final rules clarify the procedural and documentation requirements. Notably, the final regulations maintain the same minimum documentation needed to be provided by an eligible taxpayer to a transferee taxpayer, underscoring the importance of parties to carefully review contractual arrangements.
Find the final guidance from IRS here.
