One of the highly anticipated changes to energy credits in the Inflation Reduction Act of 2022 (IRA) was Section 6418 of the Internal Revenue Code (IRC), which allows taxpayers to transfer certain clean energy tax credits rather than utilize the credits themselves. Final regulations (TD 9993) released in the spring provide guidance on making irrevocable transfer elections, thereby facilitating and enhancing the utility of clean energy tax credits among all eligible taxpayers. The transferee taxpayer of a valid transfer election effectively steps into the shoes of the transferor taxpayer with respect to the transferred credit. A transferee taxpayer cannot subsequently make a transfer election of any specified credit transferred to the transferee taxpayer, so it is pivotal to confirm the credit can be utilized by the transferee before purchasing the credit. In addition to releasing these final regulations, the IRS updated their frequently asked questions for taxpayers to reference.
The final regulations contain five sections:
- §1.6418-1: Transfer of Eligible Credits
- §1.6418-2: Rules for Making Transfer Elections
- §1.6418-3: Additional Rules for Partnerships and S Corporations
- §1.6418-4: Additional Information and Registration
- §1.6418-5: Special Rules
Section 1.6418-1: Transfer of Eligible Credits
This section provides definitions of terms that are key to properly applying the rules and procedures of the transfer elections under IRC §6418.
Eligible taxpayers include any person subject to an internal revenue tax as described under §7701(a)(14), excepting organizations exempt from income tax and others listed under §6417(d)(1)(A). Note that exempt organizations can elect to make eligible credits refundable under §6417, thereby monetizing the credits when no income tax liability exists. Direct pay under §6417 for tax-exempt organizations is beyond the scope of this article.
There are 11 credits eligible for transfer elections, as listed in the table below. It is important to note that eligible credits do not include any business credit carryforwards or carrybacks under IRC §39. The amount of the credit is determined based on each single eligible credit property, including any bonus credit amounts.
| §30C – Alternative fuel vehicle refueling property* | §45Y – Clean electricity production |
| §45 – Renewable electricity production | §45Z – Clean fuel production |
| §45Q – Carbon oxide sequestration | §48 – Energy |
| §45U – Zero-emission nuclear power production | §48C – Qualifying advance energy project |
| §45V – Clean hydrogen production | §48E – Clean electricity investment |
| §45X – Advanced manufacturing production |
*To the extent the credit is treated as a credit listed in §38(b) pursuant to §30C(d)(1).
The regulations require that the transferee taxpayer must pay cash in consideration for the eligible credits. Cash is defined as a payment in U.S. dollars made by cash, check, cashier’s check, money order, wire transfer, automated clearing house (ACH), or other bank transfers of immediately available funds. The cash payment must be made beginning with the eligible taxpayer’s taxable year when the eligible credit is determined and ending on the due date for completing the transfer election statement (discussed in §1.6418-2). In addressing the comments to the regulations, the Treasury and IRS note that there is no prohibition on a transferee taxpayer making a loan to the eligible taxpayer transferring the credits if the loan is at arm’s length and treated as a loan for federal tax purposes.
Section 1.6418-2: Rules for Making Transfer Elections
Filing Requirements and Timing
A transfer election is made by an eligible taxpayer on an original return, including a superseded return, filed on or before the due date, including extensions. Separate transfer elections must be made for each specified credit with respect to each eligible credit property. The transfer elections must be consistent with the eligible taxpayers pre-filling registration (as described in §1.6418-4, discussed later in this article).
The tax return filing must include a completed source credit form for the eligible credit. For example, if a transfer election is made for a §45X credit, Form 7207, Advanced Manufacturing Production Credit, must be included with the tax return. In addition, Form 3800, General Business Credit, must be completed and included with the tax return showing the reduction for the transferor or an increase for the transferee in the credit(s) due to the transfer election(s). The forms must include the registration number assigned during the pre-filing registration. Finally, a transfer election statement, signed under penalties of perjury, must also be included with all the elements described in the regulation. It is helpful to note that the regulations do allow any document, such as a purchase and sale agreement, to be used as a transfer election statement if it contains the required information.
The transferor taxpayer must provide to the transferee taxpayer certain documentation that validates the existence of the eligible credit property, supports bonus credit amounts, and provides evidence of the transferor’s qualifying costs in the case of a transfer of an investment credit or the amount of qualifying production activities and sales amounts in the case of a transfer of a production credit. The transferee taxpayer must retain the required documentation provided by the transferor taxpayer as long as the contents thereof may become material in the administration of any Internal Revenue law.
The final regulations include specific rules for certain entity ownership situations as follows:
- Disregarded Entities: If an eligible taxpayer is the sole owner of a disregarded entity that holds an eligible credit property, then the taxpayer can make a transfer election with respect to the credit determined for that property.
- Undivided Ownership Interests: Co-owners of an eligible credit property through a tenancy-in-common or an organization with a valid IRC §761(a) election can treat their undivided ownership share as a separate eligible credit property for transfer election purposes.
- Members of a Consolidated Group: A member of a consolidated group must make a transfer election in the manner provided in the regulations to transfer any eligible credit determined with respect to the member.
- Partnerships & S Corps: Partnerships and S corps that determine an eligible credit with respect to an eligible credit property they hold directly can make a transfer election for the credit in the manner provided in §1.6418-3(d), discussed later in this article.
- Grantors or Other Trust Owners: Grantors or any other person treated as the owner of any portion of a trust may make a transfer election in the manner provided in the regulations to transfer any eligible credit determined with respect to any eligible credit property held directly by the portion of the trust that the eligible taxpayer is treated as owning.
Determining the Eligible Credit
An eligible taxpayer must own the underlying eligible credit property and conduct the activities that produce the eligible credit. For the §45X credit, which does not require ownership of the underlying eligible credit property, the eligible taxpayer is considered the one for whom the credit is determined under the §45X regulations. All rules related to the determination of the eligible credit, such as §49 at-risk rules, apply and may limit the amount of the eligible credit that can be transferred by the eligible taxpayer. Other rules may apply to the transferee taxpayer, such as the §38(c) limitation based on the amount of tax. When arranging transfer credit transactions, it is important that both parties understand the potential limitations the transferred credits may have, whether limited by the transferor taxpayer’s or the transferee taxpayer’s situation.
The amount paid to an eligible taxpayer in consideration of the transferred credits is not included in the gross income of the eligible taxpayer. Likewise, no deduction is allowed by the transferee taxpayer. If a transferee taxpayer pays an amount less than the value of the credit, the transferee is not required to treat the difference as gross income. It is important to note, anti-abuse rules prevent a transfer election made for the principal purpose of avoiding a tax liability or to increase a deduction. For example, an eligible taxpayer that provides services to a transferee taxpayer may not reduce what it charges for its services in connection with an eligible transfer election to avoid recognizing gross income. In such instances, the transfer credit transaction amount would be recharacterized, or a portion thereof, related to the performance of services and included in gross income.
Section 1.6418-3: Additional Rules for Partnerships & S Corps
These regulations stipulate that partnerships and S corps can qualify as eligible or transferee taxpayers. Partners and shareholders cannot make transfer elections individually if the eligible credit property is held directly by the entity. In general, the cash payments received in consideration of a transferred credit are considered tax-exempt income to the eligible partnership or S corp. Similarly, the cash payments by a transferee partnership or S corp are nondeductible expenses. Partners in a partnership should be especially aware of any special allocations of tax-exempt income or nondeductible expenses that may be stipulated by their partnership agreements to understand the consequences to them of a transferred credit.
Tax-Exempt Income and Nondeductible Expenses
If a partnership or S corp makes a transfer election, any amount of cash payment received is treated as tax-exempt income under IRC §705 and §1366. The tax-exempt income is treated as an investment activity as opposed to a trade or business within the meaning of IRC §469. Therefore, the tax-exempt income is not treated as passive income to any partners or shareholders who do not materially participate.
A partner’s distributive share of tax-exempt income related to the eligible transfer election is calculated based on the partner’s distributive share of the eligible credit that would have been allocated to them if the transfer election never took place. A shareholder of a transferor S corp must take its pro rata share of tax-exempt income resulting from the credit transfer. The allocation is treated as occurring on the date the credit is determined for the transferor partnership or S corp, i.e., the date the property is placed in service.
The payment by a transferee partnership or S corp in consideration for a transferred credit is treated as an expenditure not deductible or chargeable to the capital account under IRC §705(a)(2)(B) and §1367(a(2)(D). Therefore, each partner’s or shareholder’s share of the credit is determined based on each partner’s share of the nondeductible expenses used to purchase the credit.
Section 1.6418-4: Additional Information and Registration
The regulations establish a mandatory pre-filing registration process that eligible taxpayers must complete as a condition of, and prior to, transferring any portion of an eligible credit. Upon registration, an eligible taxpayer will receive a registration number, which must be reported on its return. A registration number is valid only for the taxable year in which the credit is determined and for the taxable year in which an eligible transfer election is made.
Energy Credits Online Portal
The IRS has provided an Energy Credits Online portal in which eligible taxpayers may create an account and obtain a registration number for each applicable credit property. Entities must be registered by an authorized representative who must undergo a personal identity verification process. After verification, the authorized representative will need to provide the entity’s employer ID number (EIN), name, and address. Once an entity is registered, the portal will require additional details and documentation for the eligible credit property. IRS guidance suggests that registration should be completed after placing an investment property or production facility in service, but no earlier than the beginning of the tax period when a credit is earned and at least 120 days before the due date (including extensions) for the return where the credits are reported.
Section 1.6418-5: Special Rules
Excessive Credit Transfer Tax
An excessive credit transfer occurs when the amount of the transferred credit exceeds the amount of the eligible credit that, without the application of §6418, would be otherwise allowable. The regulations provide two examples, one in which an excessive transfer does not occur and another in which it does occur, to clarify the special rule.
In Example 1, Taxpayer A owns a facility expected to generate $100 of an eligible credit. Taxpayer A claims a credit of $40 and transfers the remaining $60 credit to Taxpayer B. In a subsequent year, it is determined that the facility only generated $60 of the credit for the taxable year the transfer occurred. Taxpayer A is disallowed the $40 credit; however, an excessive credit transfer has not occurred since the credit transferred does not exceed the allowable amount.
In Example 2, we assume the same facts as Example 1 except that Taxpayer A claims a credit of $25 and transfers the remaining $75 of the expected $100 eligible credit. The subsequent determination that the facility only generated a $60 credit results in an excessive credit transfer of $15, and Taxpayer A’s $25 credit is disallowed.
A tax is imposed on excessive credit transfers equal to the amount of the excessive credit transfer plus 20%. In Example 2, the excessive credit transfer tax would therefore be $18 ($15 x 1.2). The tax is imposed in the taxable year the excessive credit transfer is determined, not the taxable year the eligible credit was originally determined unless they are the same taxable years. A transferee taxpayer may avoid the additional 20% tax if they demonstrate “reasonable cause.”
Reasonable cause is based on facts and circumstances which demonstrate to what extent the transferee taxpayer’s efforts to determine that the amount of the transferred credit is not more than the eligible credit. The regulations detail the following circumstances:
- Review of the eligible taxpayer’s records
- Reasonable reliance on third-party professional reports
- Reasonable reliance on representations from the eligible taxpayer
- Review of audited financial statements provided to the SEC, if applicable
Payments for credits made by a transferee taxpayer that are determined to be related to the excessive credit transfer do not receive treatment under §1.6418-2(e), that is, non-inclusion in gross income of the eligible taxpayer and non-deductible to the transferee taxpayer. To calculate the payment amount related to the excessive credit transfer, the payment amount is multiplied by the ratio of the amount of the excessive credit transfer to the amount of the transferred credit portion claimed by the transferee taxpayer. Returning to Example 2, if Taxpayer B paid $70 in exchange for the transferred credit, the payment amount related to the excessive credit transfer would be $14 ($70 x $15/$75).
Notification and Impact of Recapture
If the eligible taxpayer subsequently disposes of the investment credit property or it otherwise ceases to be investment credit property during the recapture period as defined in §50(a)(1)(A), the transferee taxpayer is responsible for any amount of tax increase under §50(a). In instances where the eligible taxpayer retained any amount of eligible credit related to the investment credit property, the recapture amount is allocated proportionally between the eligible taxpayer and the transferee taxpayer.
The eligible taxpayer must provide a notification including all pertinent information for the transferee taxpayer to compute the recapture amount in time for the transferee taxpayer to calculate the recapture amount by the due date of its tax return, without extensions, in the taxable year the recapture event occurs.
In turn, the transferee taxpayer must notify the eligible taxpayer of the recapture amount in time for the eligible taxpayer to calculate any basis adjustment to the investment credit property by the due date of its tax return, without extensions, in the taxable year the recapture event occurs.
Note that the disposition of a partner’s or an S corp shareholder’s interest in an eligible taxpayer is disregarded for recapture purposes assuming the eligible taxpayer retains the investment credit property.
How Forvis Mazars Can Help
These final regulations are vast and complex, requiring careful application by eligible transferor and transferee taxpayers according to their facts and circumstances. The ability to transfer credits can be a powerful tool for all parties involved to take advantage of these credits rather than see them go unused in situations where eligible taxpayers are unable to utilize them.
In addition, Forvis Mazars offers a complimentary tool that can help simplify the IRA discovery process. TaxCred PRO™ for Clean Energy is an interactive questionnaire that generates a customized clean energy tax incentive report. Learn about the IRA tax credits and deductions you or your business may be eligible for and your estimated tax benefit amounts. If you would like further information about TaxCred PRO or need assistance with credit transfers, please reach out to one of our Forvis Mazars professionals.