The Department of Treasury and the Internal Revenue Service issued final regulations on requirements for taxpayers selling clean energy tax credits.
The Inflation Reduction Act of 2022 allows taxpayers to sell most types of clean energy tax credits to unrelated parties for cash. Clean energy developers and tax credit investors have begun to welcome tax credit sales as an alternative to complex tax equity structures.
The final regulations, which are effective July 1, 2024, have been enacted in substantially similar form as the proposed regulations released in June 2023, with some clarifications regarding partnerships and S corporations that sell tax credits. The Department of Treasury and the Internal Revenue Service maintained their positions on several key issues despite taxpayer comments requesting changes:
- Tax credit buyers will be liable for most tax credit recapture events.
- Tax credit sellers may not transfer or retain bonus credits, such as the domestic content and energy community bonuses, separately from the underlying base credit amounts.
- Cash payments for tax credits may not be made prior to the start of the taxable year for which the tax credit is claimed.
Eligibility for bonus credits can often be more difficult to verify than base credit eligibility, which can prevent tax insurers from obtaining sufficient comfort to offer policies with respect to certain bonus credit amounts. The restriction on severing the base credits from these bonuses may increase the barriers to successful tax credit sales or discourage some taxpayers from pursuing the bonuses altogether.
Although early cash payments in exchange for credits remain unavailable, the preamble to the final regulations appears to approve the use of transferred tax credits as collateral to secure arm's-length loans, which may ease cash flow concerns for developers. For more information about methods for monetizing clean energy tax credits, including the use of transferable tax credits to secure financing, see our White Paper, "Tax Credits for Sale: Opportunities for Financing Renewable Energy and Carbon Reduction Projects Under the Inflation Reduction Act."
