On April 25, 2024, the Department of Treasury and the IRS (collectively "Treasury") issued final regulations to implement the Inflation Reduction Act's transferability provisions under section 6418 (the "Final Regulations").1 Treasury previously published on June 21, 2023, proposed regulations regarding transfer elections and temporary regulations regarding transferability registration requirements (the "Proposed Regulations").2 The Final Regulations are effective beginning July 1, 2024.
Section 6418 permits taxpayers that are not eligible for the direct payment election to elect to transfer all or a portion of their eligible clean energy credits for any taxable year to an unrelated taxpayer. Any payment made by the transferee taxpayer would not be deductible to the transferee nor includable as income for the transferor. The provision was included in the Inflation Reduction Act to help clean energy projects quickly access capital and financing by exchanging their tax credits for cash.
Treasury received 81 comments regarding the Proposed Regulations. The preamble to the Final Regulations highlights and discusses several areas where taxpayers requested changes or clarification, but the Final Regulations closely track the Proposed Regulations with very few changes.
1.6418-1 Transfer of Eligible Credits
The Final Regulations, like the Proposed Regulations, describe the eligible credit property for each of the 11 eligible credits.3 A taxpayer can transfer all or any portion of an eligible tax credit but a taxpayer cannot sever the bonus credit from the base credit and transfer them separately.4
In response to comments, the preamble to the Final Regulations notes that Treasury agrees that, for a section 45Q credit, the taxpayer does not need to own every component of a single process train and revised the definition of eligible credit property for the section 45Q credit to state "in the case of a section 45Q credit, a component of carbon capture equipmentwithin a single process traindescribed in §1.45Q-2(c)(3)."5
The Final Regulations also affirm that a partnership that has not elected to be treated as an applicable taxpayer for the direct pay election under section 6417 for a section 45Q, a section 45V, or a section 45X credit can qualify as an eligible taxpayer for a transfer election.6
The Final Regulations retain the rule in the Proposed Regulations that requires that the transfer must be made for cash, which includes payments by cash, check, cashier's check, money order, wire transfer, ACH transfer, or other bank transfer of immediately available funds.7
The Final Regulations retain the safe harbor timing rule of the Proposed Regulations—the payment will not violate the cash requirement if it is made within the period beginning on the first day of the eligible taxpayer's taxable year during which the eligible credit is determined and ending on the due date for the transfer election statement. 8 The eligible taxpayer can contract in advance for the sale of one or more years of credits, as long as the cash payments are made during the safe harbor time period.9 Thus, the Final Regulations, similar to the Proposed Regulations, do not allow advance payments for future credits.10
1.6418-2 Rules for Making Transfer Elections
The Final Regulations affirm the rule in the Proposed Regulations that an eligible taxpayer can make multiple transfer elections for an eligible credit, as long as the aggregate amount does not exceed the amount of the eligible credit.11 The Final Regulations also add a new provision regarding grantor trusts as an eligible taxpayer to make a transfer election.12
- Manner and Due Date for Making a Transfer Election
The Final Regulations retain the rule that an election must be made for each eligible credit property for each taxable year of an eligible taxpayer.13 The Final Regulations also clarify that a transfer election is made when all of the requirements of Treas. Reg. § 1.6418-2(b) are satisfied, meaning the transfer is not considered made until a tax return is filed.14 As noted in the preamble to the Final Regulations, this is important for brokers and others involved in a potential secondary transfer.15
- Special Rules for Certain Eligible Credits
The Final Regulations adopt the Proposed Regulations for eligible credits under sections 45, 45Q, 45V, and 45Y that require a separate election for each facility and for each taxable year beginning on the date placed in service (or for section 45Q, the date the single process chain was placed in service.)16
In response to comments requesting guidance on the issue of transferring section 45Q and 45Z separately when they are determined on the same qualified facility, the preamble noted that this is beyond the scope of the Final Regulations, but Treasury will consider the filed comment when drafting additional guidance under section 45Q and section 45Z.17
- Manner of Making a Valid Transfer Election, Due Date, and Original Return Requirement
Like the Proposed Regulations, the Final Regulations require the eligible taxpayer to make the transfer election on its original (and not amended) tax return not later than the due date (including extensions). The return must include Form 3800, General Business Credit, reporting the registration number, and an attached schedule showing the amount of credit transferred for each eligible credit property.18 There is no late election relief under Treas. Reg. §§ 301.9100-1 through 301.9100-3.19
If a taxpayer incorrectly determined the amount of an eligible credit, the Final Regulations clarify that the taxpayer is allowed to file an amended return to correct the amount of eligible credit.20 If the amount of the eligible credit is changed, the increase may not be transferred but decreases to the credit must be reflected.21
- Transfer Election Statement
The Final Regulations adopt the Proposed Regulations requiring a transfer election statement to be included with the tax return, which is a written document completed by the eligible taxpayer and the transferee that includes certain required information.22 The Final Regulations continue to require the taxpayer to provide the transferee taxpayer with "minimum documentation" regarding the credit property but, notwithstanding requests to provide additional guidance, the Final Regulations did not provide additional information regarding the level of information required.23
- Limitations After a Transfer Election is Made
The Final Regulations affirm the rule in the Proposed Regulations that a transfer election is irrevocable and a credit can only be transferred once.24
- Determining the Eligible Credit
The Final Regulations continue to require that an eligible taxpayer must own the underlying eligible credit property and conduct the activities related to the credit, except for section 45X credits.25 Notwithstanding commenters requests to the contrary, the Final Regulations reiterate that a section 45Q credit that a taxpayer elects to claim under section 45Q(f)(3)(B) is not an eligible credit that can be transferred because it was not determined with respect to an eligible taxpayer..26
- Treatment of Transfer Payments and Transaction Costs
The cash paid for the credit is not included in the eligible taxpayer's gross income nor deductible by the transferee.27 The Final Regulations also include the Proposed Rule's anti-abuse rule, which disallows a transfer election or otherwise recharacterizes the consequences of a transaction if the parties engage in the transaction or series of transactions with the principal purpose of avoiding tax liability.28 For example, if an eligible taxpayer under or over-charges for services for a customer that is also purchasing credits, it may violate the anti-abuse rule.
Despite receiving comments in response to the Proposed Regulations' request for comments on the treatment of transaction costs, the Final Regulations did not address this issue.
- Transferee's Treatment of Eligible Credit
The Final Regulations adopt the Proposed Regulations that if the transferee pays less for the eligible credit than the credit amount, there is no gross income to the transferee.29 Further, the transferee does not apply rules that relate to the determination of the eligible credit, such as the rules in section 49 (at-risk rules) or section 50(b) (certain property not eligible for a credit), but the transferee must apply rules that relate to its own particular circumstances, such as the rules in section 38 (computation of general business credit) or section 469 (passive activity limitation).30
1.6418-3 Additional Rules for Partnerships or S Corporations
Similar to the Proposed Regulations, the Final Regulations provide that a partnership or S corporation may qualify as a transferor or transferee.31 The amount of eligible credit determined by a transferor partnership or S corporation may be limited by section 49 (at-risk rules).32 The cash payment would be treated as tax-exempt income for the partnership or S corporation for purposes of sections 705 and 1366.33 Tax-exempt income resulting from a transfer election made by a partnership or S corporation is not treated as passive income to any partners or shareholders who do not materially participate.34
1.6418-4 Additional Information and Registration
The Final Regulations adopt the Proposed Regulations pre-filing registration requirements that require the taxpayer to obtain a registration number for each applicable property through the IRS's registration process.35 Transfer registration numbers are valid only for one taxable year and the Final Regulations adopt the Proposed Regulations' requirement that the taxpayer must renew the registration for a subsequent taxable year, including attesting that all the facts previously provided are still correct or updating any facts.36
1.6418-5 Special Rules/Excessive Payment
The Final Regulations adopt the rule in the Proposed Regulations that a 20% penalty is imposed on a transferee if the amount of the transfer payment is excessive.37 This penalty does not apply if the taxpayer demonstrates that the excessive payment was due to reasonable cause.38 The Final Regulations reiterate that any recapture tax under section 50(a), 49(b), or 45Q(f)(4) is imposed on the transferee, but there is no prohibition against a contractual indemnity by the eligible taxpayer to the transferee.39
Footnotes
1 89 Fed. Reg. 34,770 (Apr. 30, 2024) (Final Rule: Transfer of Certain Credits)available athttps://www.govinfo.gov/content/pkg/FR-2024-04-30/pdf/2024-08926.pdf
2 88 Fed. Reg. 40,496 (Jun. 21, 2023) (Proposed Rule: Section 6418 Transfer of Certain Credits); 88 Fed. Reg. 40,094 (Jun. 21, 2023) (Temporary Rule: § 1. 6418-4T Additional Information and Registration).
3 Treas. Reg. § 1.6418-1(d)(1)-(11).
4 Treas. Reg. § 1.6418-1(h).
5 89 Fed. Reg. at 34,772;see alsoTreas. Reg. § 1.6418-1(d)(3)).
6 89 Fed. Reg. at 34,772.
7 Treas. Reg. § 1.6418-1(f))(1).
8 Treas. Reg. § 1.6418-1(f))(2).
9 Treas. Reg. § 1.6418-1(f))(3).
10 89 Fed. Reg. at 34,773.
11 Treas. Reg. § 1.6418-2(a)(2).
12 89 Fed. Reg. at 34,774;see alsoTreas. Reg. § 1.6418-2(a)(3)(v).
13 Treas. Reg. § 1.6418-2(b)(1); Treas. Reg. § 1.6418-4(c)(2).
14 89 Fed. Reg. at 34,774.
15 Id.
16 Treas. Reg. § 1.6418-2(b)(2)(i)-(ii).
17 Id.
18 Treas. Reg. § 1.6418-2(b)(3)(i)-(v); (b)(4)(i).
19 Treas. Reg. § 1.6418-2(b)(4)(i).
20 Treas. Reg. § 1.6418-2(b)(4)(ii)(A)-(C).
21 89 Fed. Reg. at 34,776-77.
22 Treas. Reg. § 1.6418-2(b)(5)(i)-(ii).
23 Treas. Reg. § 1.6418-2(b)(5)(iv).
24 Treas. Reg. § 1.6418-2(c)(1)-(2).
25 Treas. Reg. § 1.6418-2(d),see also89 Fed. Reg. at 34,774.
26 Treas. Reg. § 1.6418-2(a)(4)(iii).
27 Treas. Reg. § 1.6418-2(e)(2)-(3).
28 Treas. Reg. § 1.6418-2(e)(4).
29 Treas. Reg. § 1.6418-2(f)(2).
30 Treas. Reg. § 1.6418-2(f)(3)(i)-(ii).
31 Treas. Reg. § 1.6418-3(a)(1).
32 Treas. Reg. § 1.6418-2(d)(2).
33 Treas. Reg. § 1.6418-3(a)(2)(i).
34 Treas. Reg. § 1.6418-3(a)(5).
35 Treas. Reg. § 1.6418-4(a)-(b), (b)(4).
36 Treas. Reg. § 1.6418-4(c)(2).
37 Treas. Reg. § 1.6418-5(a)(1).
38 Treas. Reg. § 1.6418-5(a)(4).
39 Treas. Reg. § 1.6418-5(d),(e).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.