Transferable Energy Tax Credit Options
The Inflation Reduction Act of 2022 has brought in new opportunities for taxpayers by allowing the purchase and sale of certain federal tax credits. One of the provisions of this act is the transferable energy tax credit options, which can be monetized through transfers to a third party at a negotiated amount for taxable entities. The credits related to carbon capture, clean hydrogen, and manufacturing components for renewable generation facilities are refundable through direct payment at 100% of their value. However, these credits are refundable to tax-exempt entities only.
According to Biz Journals, these credits could be a game changer for developers and owners of renewable energy and other types of clean energy projects, as they provide alternatives to often costly and complex tax equity structures.
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The IRS has yet to release guidance on the credit transfer process, but taxpayers generating credits will need to analyze the benefit of transferring credits to the cost of not being able to monetize the tax depreciation associated with the project, which isn’t transferable or eligible for direct payments under the Inflation Reduction Act. The transfer of credits before or shortly after generation could allow for more efficient bridge financing, engineering, procurement, and construction contract payoffs.
The newly added Internal Revenue Code (IRC) Section 6418 under the act allows eligible taxpayers to elect to transfer various tax credits in whole or in part to an unrelated third party as defined under IRC Sections 267(b) and 707(b)(1). However, buyers should expect some gain for using the credit based on the discount because the such gain isn’t specifically identified as exempt.
Overall, the transferable energy tax credit options provide an opportunity, for taxpayers to invest in clean energy projects, with the potential to generate returns and contribute to reducing carbon emissions. The IRS is expected to release guidance on the credit transfer process, and taxpayers should consult with their tax advisors to evaluate the benefits and risks of transferring credits under the Inflation Reduction Act.
