On April 25, 2024, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations on the transferability of certain tax credits under the Inflation Reduction Act of 2022 (IRA) (Final Regulations). Treasury and the IRS previously issued Notice 2022-50 on October 24, 2022 and proposed regulations on June 21, 2023 (Proposed Regulations). The final regulations generally conform to the Proposed Regulations, but include some key differences and clarifications.

For previous Eversheds Sutherland coverage on the transferability guidance, see Treasury and IRS release proposed regulations on transferability of IRA renewable energy credits and Treasury and the IRS release much-anticipated guidance, including with respect to the monetization of energy tax credits.

Transferability in General

Section 6418 allows eligible taxpayers to monetize eligible credits by electing to transfer the tax credits to an unrelated person. Any amount of consideration paid by the transferee taxpayer to the eligible taxpayer for the transfer of eligible credits (i) is required to be paid in cash, (ii) is not included in the eligible taxpayer's gross income, and (iii) is not allowed as a deduction to the transferee taxpayer.

For purposes of section 6418, an “eligible taxpayer” is any taxpayer that is not considered an “applicable entity” under the elective rules of section 6417 (which rules generally allow an applicable entity, such as tax-exempt and governmental entity, rural electric cooperative, or, in the case of tax credits under sections 45Q, 45V and 45X, a taxpayer electing to be treated as an applicable entity, to monetize credits through a direct payment from the Treasury).

Further, for purposes of section 6418, eligible credits include:

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

To qualify for transferability under section 6418, an eligible taxpayer must make a transfer election on an original return for the taxable year for which the credit is determined. The election must be made by the due date of the original tax return, including extensions, and cannot be made on an amended return. The election also may not be revoked. Moreover, an eligible credit may only be transferred pursuant to a section 6418 transfer election once; accordingly, a transferee cannot make a transfer election for any portion of an eligible credit transferred to the transferee under section 6418. In general, special rules apply to partnerships and S corporations.

Final Regulations – Key Clarifications and Changes

• Eligible Credit Property for purposes of section 45Q. The Proposed Regulations provided that an eligible credit would be determined, for purposes of section 45Q, based on a single process train of carbon capture equipment. Pre-IRA Authority, Rev. Rul. 2021-13, 2021-30 I.R.B. 152, provided that a taxpayer need own only one component in a single process train to be the person to whom the section 45Q credit is attributable. The Final Regulations are consistent with Rev. Rul. 2021-13 and define eligible credit property with respect to the section 45Q credit as a component of carbon capture equipment within a single process train described in section 1.45Q-2(c)(3).
• Payment in Cash Rule. Section 6418 requires any amount paid by a transferee taxpayer to an eligible taxpayer as consideration for a transfer be paid in cash. The Final Regulations retain the rules of the Proposed Regulations with respect to the paid in cash rule. Notably, in the preamble to the Final Regulations, Treasury and the IRS denied the request of commentators to revise the paid in cash rule to allow upfront payments for transfers of PTCs that are expected to be determined in a future year (i.e., based on the 10-year credit period for PTCs). Treasury and the IRS declined to revise the paid in cash rule to include advanced payments due to complex legal and administrative issues. However, the preamble to the Final Regulations affirms that there is no prohibition on loans from a transferee taxpayer to an eligible taxpayer, including loans secured by a purchase and sale agreement for eligible credits, provided that such loans are at arm’s length and treated as loans for federal income tax purposes.
• Specified Credit Portion. Section 6418(a) provides that an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit determined with respect to such taxpayer. The Proposed Regulations defined the term “specified credit portion” to mean a proportionate share (including all) of an eligible credit determined with respect to a single eligible credit property of the eligible taxpayer that is specified in a transfer election. Under the Proposed Regulations, an eligible taxpayer would not have been permitted to sever bonus credit amounts taken into account to determine an eligible credit (e.g., bonus credits for satisfying the prevailing wage and apprenticeship requirements, or the domestic content requirements) from the base eligible credit, and would not have been permitted to separately transfer any bonus credit amount or base eligible credit amount (horizontal credit transfer). The Final Regulations adopt the definition of “specified credit portion” without change, and thus severance of bonus credit amounts and horizontal credit transfers are not permitted.
• Denial of Transfers Following Certain Elections. The Proposed Regulations provided that an eligible taxpayer would not be permitted to transfer eligible credits if the eligible credits are not determined with respect to the eligible taxpayer. As an example, the Proposed Regulations would have provided that a section 45Q credit allowable to an eligible taxpayer because of an election under section 45Q(f)(3)(B) (which election permits the owner of carbon capture equipment to cause the section 45Q credit to be allowable to a person that disposes of, or uses for certain purposes, carbon dioxide) would not be considered determined with respect to the eligible taxpayer and thus would not be transferable under section 6418. The Proposed Regulations provided for the same result for a section 48 credit allowable to an eligible taxpayer because of an election made under section 50(d)(5) and section 1.48-4 (under which the lessor of a leased project can elect to pass through the section 48 credit to the project lessee). The Final Regulations retain these rules without change.
• Elections Made on Superseding Returns; Corrections.
  • The Final Regulations clarify that a transfer election filed by an electing taxpayer may be made or revised on an original return that is a superseding return, but may not be made on an amended return (or, in the case of an eligible taxpayer that is a partnership subject to the BBA audit procedures, an administrative adjustment request (AAR)). Further, the Final Regulations clarify that a numerical error with respect to a properly claimed transfer election may be corrected on an amended return or by filing an AAR if necessary. In order to correct an error on an amended return or AAR, an eligible taxpayer must have made an error in the information included on the original return on which the election was made, such that there is a substantive item to correct. A taxpayer cannot correct a blank item or an item that is described as being “available upon request.”
  • The Final Regulations clarify that an eligible taxpayer may, after making a timely and complete transfer election, file an amended return or AAR to adjust the amount of the eligible credit reported on the eligible taxpayer’s original return if the amount of the eligible credit was incorrectly reported on the original return. An increase in credits generally can be claimed by the eligible taxpayer but not by the transferee taxpayer; a decrease in credits generally first reduces the amount of eligible credit (if any) retained by the eligible taxpayer and then reduces the amount reported to the transferee taxpayer(s), which may result in an excessive credit transfer and resulting tax liability to the transferee(s). Further, an eligible taxpayer may recognize income to the extent it received a payment that directly relates to the excessive credit transfer. The Final Regulations do not mandate a reporting or notification requirement on the eligible taxpayer or transferee taxpayer in the event of a correction of the eligible credit amount that occurs after the filing of the transfer election.
• No Additional Transfer Rule; Tax Ownership of Credits. Under section 6418, an eligible credit may only be transferred pursuant to a section 6418 transfer election once. The preamble to the Proposed Regulations stated that an arrangement using a broker to match eligible taxpayers and transferee taxpayers should not violate the no additional transfer rule, assuming the arrangement at no point transfers the federal income tax ownership of a specified credit portion to the broker or any taxpayer other than the transferee taxpayer. In response to comments on the Proposed Regulations, in the preamble to the Final Regulations, the Treasury and IRS concluded that it is unnecessary to apply benefits and burdens of ownership principles to transfers of eligible credits under section 6418. The Final Regulations clarify that, until the requirements of a valid transfer election are satisfied, there is no valid transfer and no transferee taxpayer.
• Estimated Tax Payments.
  • The Final Regulations clarify that, because a transferee taxpayer effectively steps into the shoes of the eligible taxpayer with respect to transferred credits, the transferee can take transferred credits into account for purposes of determining the transferee’s quarterly estimated tax liability no earlier than an eligible taxpayer would take the credits into account. Further, if a transferee taxpayer is required to take a transferred eligible credit into account in a taxable year that has not yet begun (because the eligible taxpayer and the transferee have different taxable years), the transferee taxpayer cannot take the eligible credit into account for purposes of determining quarterly estimated tax liability until after the start of that later year.
    • The preamble to the Proposed Regulations states, as an example, that if a calendar year eligible taxpayer enters into an agreement with a calendar year transferee taxpayer during calendar year 2024 to transfer an eligible credit, and such credit is determined with respect to the eligible taxpayer in calendar year 2024, then assuming a timely and complete transfer election is made, the transferee taxpayer can take the transferred credit into account when calculating the required annual payment and quarterly estimated tax installments for calendar year 2024. The transferee taxpayer cannot treat the transferred credit as a payment of estimated tax. If any portion of the eligible credit that is ultimately transferred to a transferee taxpayer under section 6418 is subsequently adjusted to an amount less than what was agreed upon by the eligible taxpayer and the transferee taxpayer in calendar year 2024, the transferee taxpayer may be liable for any additions to tax under sections 6654 or 6655, given the reduced credit amount being transferred.
    • The Final Regulations also clarify that all of the requirements of section 6418 do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations, although the transferee taxpayer remains liable for any additions to tax in accordance with sections 6654 and 6655 of the Code to the extent the transferee taxpayer has an underpayment of estimated tax if the eligible credit is not obtained as expected.
• Excessive Credit Transfers. An excessive credit transfer is generally defined as, with respect to a facility or property for which an election is made under section 6418 for any taxable year, an amount equal to the excess of (1) the amount of the eligible credit claimed by the transferee taxpayer with respect to such facility or property for such taxable year; over (2) the amount of the eligible credit that, without application of section 6418, would be otherwise allowable under the Code with respect to such facility or property for such taxable year. The Final Regulations clarify that a transferee taxpayer is not precluded from deducting (subject to general income tax principles) the portion of the consideration paid to the eligible taxpayer for a specified credit portion that relates to an excessive credit transfer. In addition, the Final Regulations clarify that the amount of a payment that directly relates to an excessive credit transfer is equal to the total consideration paid in cash by the transferee taxpayer for its specified credit portion multiplied by the ratio of the amount of the excessive credit transferred to the transferee taxpayer to the amount of the transferred specified credit portion claimed by the transferee taxpayer.
• Recapture Risk. In comparison with excessive credit transfers, recapture of a tax credit occurs only if the original tax credit reported would have been correct without the occurrence of a subsequent recapture event. The Proposed Regulations provided that the transferee taxpayer’s credit would be reduced in the case of a recapture event, which would have generally imposed recapture risk primarily on the transferee taxpayer, even where the eligible taxpayer had retained a portion of the credit, subject to special rules in the case of recapture events attributable to a partner or S corporation shareholder that disposed of an interest in a transferor partnership or transferor S corporation. In response to comments on the Proposed Regulations, the Final Regulations provide that the credit is recaptured proportionately by the transferee and the eligible taxpayer with respect to the transferred and retained credits, respectively. The Final Regulations add formulas for determining the recapture amount for which each of the transferee taxpayer and an eligible taxpayer is responsible. Further, the Final Regulations include rules to prevent duplicate recapture of the same credit amount.
• Credit Carryforward. The Final Regulations provide clarification that the transferee taxpayer should be able to carryforward an unused credit amount of a transferred credit.
• REITS. The Final Regulations provide that eligible credits that have not yet been transferred pursuant to section 6418 are disregarded for purposes of the REIT asset test. Further, the Final Regulations provide that a transfer of credits is not a sale of property for purposes of the REIT prohibited transaction safe harbor.
• Transaction Costs. Neither the Proposed Regulations nor the Final Regulations address the federal income tax treatment of transaction costs incurred in connection with credit transfers, either for the eligible taxpayer or the transferee. The preamble to the Final Regulations states that Treasury and the IRS anticipate issuing further guidance regarding transaction costs.

The Final Regulations are effective on the date that is 60 days after publication in the Federal Register, (scheduled to be April 30, 2024). If published as scheduled, the effective date will be June 29, 2024. The IRS updated the Transferability FAQ page on April 25, 2024.

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