The U.S. Department of the Treasury and IRS on June 14, 2023, released two notices of proposed rulemaking (NOPRs) regarding the direct payment of tax credits under Section 6417 of the Internal Revenue Code (Elective Payment of Applicable Credits), the transferability of tax credits under Section 6418 (Transfer of Certain Credits) and temporary regulations regarding mandatory information and registration requirements for taxpayers planning to make an elective payment election under Section 6417 or to make an election to transfer certain tax credits under Section 6418 (Pre-Filing Registration Requirements for Certain Tax Credit Elections). The NOPRs and temporary regulations provide much-needed clarity to taxpayers seeking to either receive a direct payment of tax credits or secure buyers of tax credits for efforts aimed at achieving certain environmental, manufacturing and energy goals.
As part of the Inflation Reduction Act, certain taxpayers may elect for a direct payment in lieu of a tax credit. Tax-exempt entities, state or local governments (or political subdivisions thereof), the Tennessee Valley Authority, Indian tribal governments or any Alaska Native corporation may make an election for direct pay. Other taxpayers are eligible for direct pay of the following energy, environmental and manufacturing credits for a limited number of years: Sections 45V (clean hydrogen), 45Q (carbon capture and sequestration) and 45X (advanced manufacturing production credit).
Taxpayers may also make a yearly election to transfer all (or any portion) of an eligible credit to an unrelated taxpayer, provided that consideration for such a transfer is paid in cash. The consideration is not included in the transferor's gross income and is not deductible by the transferee. Any taxpayer other than those entitled to direct payments are entitled to transferability. The credit is taken into account in the first taxable year of the transferee taxpayer ending with or after the taxable year of the eligible taxpayer with respect to which the credit was determined.
These new monetization options, along with the traditional tax equity options, provide significant opportunities for renewable energy developers to monetize tax credits and for investors to make investments in renewable energy projects to reduce their effective tax rate and satisfy environmental, social and governance (ESG) goals.
The Holland & Knight Energy Tax Team is reviewing the NOPRs and temporary regulations and will provide additional analysis.
