On June 14, 2023, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released a package of much-awaited guidance (the Guidance) consisting of (i) proposed regulations addressing the tax credit monetization mechanisms created under the Inflation Reduction Act of 2022 (IRA) – “transferability” (REG-101610-23) and “elective pay” (REG-101607-23), (ii) proposed regulations concerning the elective payment election of the advanced manufacturing investment credit under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 (REG-105595-23), and (iii) temporary regulations setting forth mandatory information and registration requirements for taxpayers planning to make a transferability or elective payment election under the Inflation Reduction Act of 2022 or the CHIPS Act of 2022, as applicable (T.D. 9975). The Guidance answers a number of questions commonly posed regarding these rules, some in a manner not favorable to taxpayers.

Background

Transferability: The IRA allows “Eligible Taxpayers” (generally, all taxpayers other than tax-exempt organizations, State and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives) to transfer all (or any portion) of an Eligible Credit (as defined below) to an unrelated taxpayer in exchange for cash, rather than applying the credits against their federal income tax liability. This cash consideration is not includible in the transferor’s gross income and is not deductible by the transferee.

“Eligible Credits” include:

• Credits for alternative fuel vehicle refueling property (section 30C);
• Renewable electricity production credits (production tax credits) (section 45(a));
• Credits for carbon oxide sequestration (section 45Q(a));
• Zero-emission nuclear power production credits (section 45U(a));
• Clean hydrogen production credits determined (section 45V(a));
• Advanced manufacturing production credits (section 45X(a));
• Clean electricity production credits (section 45Y(a));
• Clean fuel production credits determined (section 45Z(a));
• Energy credits (investment tax credits) (section 48);
• Qualifying advanced energy project credits (section 48C); and
• Clean electricity investment credits (section 48E).

Elective Pay: The IRA allows “Applicable Entities” (generally, tax-exempt organizations, State and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives) to make an election to treat an Applicable Credit (as defined below) as a tax payment equal to the amount of such credit. For example, if an Applicable Entity makes the election and, after filing its US federal income tax return, has any remaining federal income tax liability, then the available credit offsets federal tax liability, but the rest is refunded to the Applicable Entity. If the electing Applicable Entity has no federal income tax liability, the Applicable Entity will receive a refund from the IRS equal to the full amount of the Applicable Credit. “Applicable Credits” generally include each of the credits eligible for transferability listed above, plus credits for qualified commercial vehicles determined under section 45W.

Taxpayers other than Applicable Entities are eligible for elective pay only for section 45V (clean hydrogen), section 45Q (carbon capture and sequestration), and section 45X (advanced manufacturing production credit), with certain limitations.

The Guidance

The Guidance includes proposed regulations with respect to both transferability (the Transferability Proposed Regulations) and elective pay (the Elective Pay Proposed Regulations).

Transferability Proposed Regulations

The Transferability Proposed Regulations provide rules for the election to transfer Eligible Credits in a taxable year, special rules applicable to partnerships and S corporations and rules regarding excessive credit transfers or recapture events. In addition, they introduce rules relating to a required IRS pre-filing registration process. A subsequent Eversheds Sutherland Legal Alert will describe these rules in more detail; however the following are key initial observations:

• An Eligible Taxpayer would not be permitted to divide an Eligible Credit into a base credit amount and one or more bonus amounts (e.g., bonuses for satisfying the domestic content requirement). Instead, an Eligible Taxpayer would be permitted to transfer the entire Eligible Credit (or portion of the entire Eligible Credit, which would include a proportionate amount of any component part of the entire Eligible Credit).
• Guidance is provided with respect to the timing of cash payments and clarification that if any consideration is other than cash, the transfer election is disallowed entirely.
• Clarification that multiple transfer elections are permitted (i.e., that a taxpayer may elect to transfer portions of one or more credits to multiple transferees) so long as the amount of the transfers does not exceed the amount of the Eligible Credit(s).
• For undivided ownership interests, if eligible property (Eligible Credit Property) is directly owned through a tenancy-in-common (TIC) arrangement, or through an organization that has properly elected out of subchapter K, each co-owner’s or member’s undivided ownership share of the Eligible Credit Property will be treated as a separate Eligible Credit Property owned by such co-owner or member. Each co-owner or member would make a separate transfer election to allow for the transfer of its respective portion of the credit.
• Greater certainty provided regarding the recapture of certain tax credits in the event that a project becomes ineligible during the recapture period. Previously, there was some uncertainty as to who bears the risk of recapture if a project falls out of compliance. The proposed rules provide that when a tax credit is transferred and there is a recapture event, the risk falls on the transferee. It is important to note that there is no prohibition for an Eligible Taxpayer and a transferee to (1) contract for indemnification of the transferee, or (2) rely on tax insurance policy coverage in the event of recapture.
• Explanation of the consequences to a transferee in the case of an “excessive credit transfer”. Consequences include a penalty equal to 20 percent of the excessive credit transfer with reasonable cause relief. The transferor taxpayer is subject to tax on payments received for an excessive transfer.
• Taxpayers subject to the passive activity limitation rules of section 469 would be subject to such rules with respect to transferred credits.

Elective Pay Proposed Regulations

The Elective Pay Proposed Regulations describe rules for the elective payment of Applicable Credit amounts in a taxable year, special rules applicable to partnerships and S corporations and rules regarding repayment of excessive payments. Like the Transferability Proposed Regulations, these proposed regulations provide new rules related to an IRS pre-filing registration process that would be required in order to take advantage of credits through elective pay. A subsequent Eversheds Sutherland Legal Alert will describe these rules in more detail, but below are certain initial observations:

• Entity approach (rather than the aggregate approach) with respect to classifying partnerships and S corporations as “Applicable Entities” eligible to take advantage of elective pay. Therefore, a partnership or S corporation would not be an Applicable Entity, even if all of its partners or shareholders were Applicable Entities, and, as a result, would not be eligible for elective pay (except with respect to section 45V (clean hydrogen), section 45Q (carbon capture and sequestration), and section 45X (advanced manufacturing production credit), with certain limitations).
• If an Applicable Entity is a co-owner of eligible property with respect to which the amount of an Applicable Credit is determined (Applicable Credit Property) through an ownership arrangement treated as a TIC or pursuant to a joint operating arrangement that has properly elected out of subchapter K, then each owner is considered to own an undivided interest in or share of the underlying Applicable Credit Property and thus, any Applicable Credits are determined separately with respect to each owner. As a result, an Applicable Entity may make an elective payment election with respect to its share of Applicable Credits. An Applicable Entity seeking to engage with non-Applicable Entities (including for-profit entities) may still be able to take advantage of elective pay.
• An elective payment election would not be available for any credits purchased pursuant to the transferability provisions, transferred pursuant to section 45Q(f)(3), acquired by a lessee from a lessor by means of an election to pass through the credit to a lessee under former section 48(d) (pursuant to section 50(d)(5)), owned by a third party, or otherwise not determined with respect to the Applicable Entity or electing taxpayer.
• Explanation of the consequences of an “excessive payment” under section 6417. The eligible entity is subject to an increase in tax (even if otherwise tax exempt), and a penalty equal to 20 percent of the excessive payment with reasonable cause relief.

CHIPS Related Elective Payment Proposed Regulations

The Guidance also includes proposed regulations addressing the elective payment of the advanced manufacturing investment credit under the CHIPS Act of 2022 (the Advanced Manufacturing Investment Proposed Regulations). The Advanced Manufacturing Investment Proposed Regulations describe rules for the elective payment election, including special rules applicable to partnerships and S corporations, repayment of excessive payments, and basis reduction and recapture. Moreover, these proposed regulations provide rules related to a new IRS pre-filing registration process that taxpayers wanting to make the elective payment election would be required to follow.

Registration Requirements for Transferability and Elective Pay Temporary Regulations

Finally, the Guidance includes temporary regulations that set forth mandatory information reporting and registration requirements for taxpayers planning to make a transferability election or elective payment election under the IRA or CHIPS Act of 2022. Under these temporary regulations, taxpayers making a transferability or elective payment election are required to complete a pre-filing registration through an online portal and receive a registration number. IRS will review a taxpayer’s registration application and will issue a registration number for each credit for which the applicable entity or electing taxpayer provided sufficient verifiable information. It is not clear how rigorous this preliminary review will be. Receipt of a registration number does not, by itself, qualify a taxpayer as eligible to transfer a credit or receive a payment. These temporary regulations are set to expire on June 21, 2026.

Comments Requested

The IRS and Treasury are seeking written or electronic comments with respect to the Guidance by August 14, 2023.

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