SOLAR TAX CREDIT TRANSFERABILITY
The Inflation Reduction Act passed by President Joe Biden in 2022 allows entities without Federal tax liability to transfer their solar investment tax credit for cash to a third-party buyer. The U.S. Department of the Treasury recently issued proposed regulations (the Proposed Regulations) providing guidance on the ability of taxpayers to transfer by sale certain federal income tax credits derived from investments in renewable energy projects. Although there are several technologies that qualify for these credits, we will focus exclusively on solar.
Who Can Sell and Who Can Buy Credits?
Sellers. The Guidance allows any “eligible taxpayer” to sell credits. A “taxpayer” means any person subject to any internal revenue tax.
- Thus, under the Guidance, a seller of credits can be any taxpayer other than an entity that is eligible for the direct pay election; namely, for-profit corporations, including S corporations, partnerships, individuals, trusts, and similar taxpayers.
Buyers. A buyer of credits (referred to as the “transferee taxpayer” throughout the Guidance) is any entity with federal income tax liabilities for which credits can be used and which is not related (within the meaning of Code Sections 267(b) and 707) to the seller. Transferee taxpayers can be partnerships, corporations, including S corporations, individuals, trusts, and similar taxpayers.
Solar tax credit transferability allows entities without Federal tax liability to sell their investment tax credits to a buyer for a cash payment.
How Are Tax Credits Sold?
In very general terms, a sale of credits will typically involve a purchase agreement, indemnity or guarantee agreement, insurance coverage for specified recapture events, along with seller provided transactional diligence related to the project generating the credits. Beyond those negotiated items, the “How” in this section pertains specifically to the tax-required mechanics of a credit sale as set forth in the Guidance.
Pre-filing registration with IRS.
As a crucial first step, the Guidance requires sellers to register with the IRS before selling any credits; specifically, before filing the tax return on which a transfer election (discussed below) with respect to credits to be sold is made and to provide information related to each eligible credit property for which the seller intends to transfer all or a specified portion of credits. The seller must satisfy the pre-filing registration requirements set forth in the Guidance.
After the required pre-filing registration process is successfully completed, the seller will receive a unique registration number (Registration Number) from the IRS for each registered “eligible credit property” for which the seller intends to transfer credits. The Guidance anticipates that this pre-filling registration process will occur through an IRS electronic portal. A seller must obtain a separate Registration Number for each “eligible credit property” and cannot aggregate multiple properties under one Registration Number. Registration Numbers are valid only for the taxable year obtained, but may be renewed via the IRS registration portal.
What constitutes an “eligible credit property” varies based on the specific renewable energy projects described above. For the investment tax credit under Code Section 48, a credit eligible property is determined on a “property by property” basis, which generally means with respect to the “energy property” determined under that Code Section. The Guidance indicates that a seller may make a transfer election with respect to an “energy project” (which comprises multiple energy properties) based on additional forthcoming guidance. Sellers will need to be especially careful in determining the appropriate unit of measurement for making a transfer election based on the renewable energy property from which the credit is derived.
In connection with any sale of credits, the Registration Number will be reported on both the seller’s and buyer’s tax return for the taxable year of the sale. A seller that does not obtain a Registration Number and report the Registration Number on its tax return with respect to an eligible credit property is ineligible to make a transfer election. As a result, any credit sales without such Registration Number will be invalid.
Other Tax Credit Sale Considerations
All credit sales must be paid in cash. Cash means specifically U.S. dollars, and no cash equivalents or any other consideration is permitted, not even a de minimis amount. Other critical points are as follows:
- Credits cannot be sold for progress expenditures.
- Credits can only be sold one time.
- Credits must include all bonus credit amounts. In other words, increases to the applicable percentage for calculating the credit amount, such as for energy communities and domestic content requirements, cannot be sold separately from the base energy credit amount. Therefore, multiple transfers of credits from a single credit eligible property must include a proportionate share of any bonus credit amounts.
- Buyers are subject to passive activity limitations on the use of purchased credits. Therefore, buyers that are subject to the passive activity rules are not treated as materially participating in the seller’s trade or business. As a result, the credits would be treated as passive activity credits to the buyer.
- Buyers can use credits against estimated income tax.
- Buyers can use credits via a 3-year carryback or a 22-year carryforward of unused credits. However, credits cannot be sold if they are in carryforward or carryback status.
- Buyers purchasing credits at a discount to the credit value (e.g., $0.90 cents per $1.00 of credit) do not include the discount in gross income for tax purposes.
- Proceeds from the sale of credits are not includable in gross income of the seller for tax purposes and payments for credits are not deductible for any reason to the buyer.
The above synopsis of the transferability of investment tax credits is not tax advice. More information can be found here: Elective Pay and Transferability Frequently Asked Questions: Transferability | Internal Revenue Service (irs.gov)
Want to minimize your organization’s Federal tax liability through solar tax credit transferability? Inquire today for a commercial solar quote through the contact us button below!
This blog provides an overview of the federal investment tax credits for businesses and other entities that own solar facilities. It does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department. Please consult a licensed tax professional regarding your organizations specific situation as we are not tax advisers.