Summary

The IRS recently released guidance with respect to the new tax credit direct payment and transferability rules created under the Inflation Reduction Act enacted last August. The guidance explains how to register for and claim the benefits of the new rules.

The Upshot

• The new rules were enacted to further subsidize and increase investment in clean energy projects by facilitating the use of clean energy tax credits, such as tax credits for solar and wind projects, clean fuel production projects, and clean hydrogen production projects.

• The guidance establishes a two-step process for taking advantage of the new provisions: the applicable entity or electing taxpayer must register the property generating the tax credit with the IRS and receive a registration number, and, after the registration process is completed, the applicable entity or electing taxpayer can file for the payment or transfer.

Proposed Guidance on Elective Payments and Transfers of Clean Energy Tax Credits

On June 14, 2023, the Internal Revenue Service (the IRS) issued proposed and temporary regulations addressing the new tax credit direct payment and transferability rules created under new sections 6417 and 6418 of the Internal Revenue Code of 1986, as amended (the Code). The new guidance is applicable to tax years beginning after June 21, 2023. The guidance addresses how to apply for and claim the benefits of the new rules.

Refundable Tax Credits and Selling Credits to Third Parties

The new rules were enacted to further subsidize and increase investment in clean energy projects by facilitating the use of clean energy tax credits, such as tax credits for solar and wind projects, clean fuel production projects, and clean hydrogen production projects. Prior to the enactment of section 6417, for example, governmental and tax-exempt entities generally were not able to claim or use these credits, at least directly. Section 6417 addresses this issue by permitting such entities, referred to as “applicable entities,” to obtain the credit through the mechanism of a refundable tax credit. Similarly, in the case of taxable entities, prior to the enactment of section 6418, the credits, although technically available, often were not as effective as they might be otherwise because the taxpayers developing qualifying projects did not have adequate tax liability to fully utilize them or were subject to other limitations, including the passive activity loss rules. Section 6418 addresses this issue by establishing a mechanism for these taxpayers to monetize the tax credits by selling them to third parties.

Overview of Guidance

The guidance establishes a two-step process for taking advantage of the new provisions: first, the applicable entity or electing taxpayer (which includes an entity being treated as partnership and a member of a consolidated group) that will choose either a direct payment or a transfer of tax credits must register the property generating the tax credit with the IRS and receive a registration number. This requirement is intended to permit the IRS to monitor the use of these provisions to avoid abuse. Second, after the registration process is completed the applicable entity or electing taxpayer can file with the IRS for the payment or transfer.

Registration of the Tax Credit

The registration processes for applicable entities filing for a refundable credit under section 6417 and taxpayers electing to transfer credits under section 6418 are similar. The applicable temporary regulations provide:

1. the registration must be done through a portal (which as of the date of this alert has not been posted),
2. the registration must be done separately with respect to each eligible tax credit property,
3. the registration must be completed and a registration number assigned before an applicable entity can claim the payment or an electing taxpayer can transfer the credit, and
4. all of the information required by the portal must be provided.

The guidance indicates that the information required by the portal will include identifying information relating to the entity or taxpayer, information relating to the tax credit property, the type of credit, the tax year of the registrant, and the specific energy tax credit in question, and the type of tax return normally filed by the applicable entity or taxpayer, or that the applicable entity, such as a state or local governmental entity, does not normally file tax returns.

Making the Election for Direct Payment or Transfer

After registering the tax credit property and receiving a registration number, the electing entity or taxpayer must file an annual tax return to receive the payment/refund or transfer the credit. Governmental and other entities not otherwise required to file an annual return should file a Form 990-T to make an election for a direct payment/refund. As part of the annual return, the entity or taxpayer electing a direct payment/refund or transfer of tax credit also should include a source credit form with respect to the tax credit property and a Form 3800, General Business Credit, in addition to any other supplemental information as required by the forms’ instructions. Any election for the transfer of tax credits also must be accompanied by a transfer election statement that provides, among other things, the transferee’s information and the necessary information and amounts to allow the transferee to take into account the credit to be transferred.

The proposed guidance also covers other related issues, including the eligibility for both elections, and specific rules for S corporations, partnerships, and consolidated groups. The guidance also addresses issues arising after one or more initial filings, including filings to address corrections and situations where there credit recapture is required.