Tax Credits For SaleJuly 17, 2023 | By Erik Lincoln
The Inflation Reduction Act created new ways for taxpayers to monetize / sell their energy tax credits. The IRS released guidance on June 14, 2023 to help clarify the new rules.
The new guidance includes FAQs, temporary regulations on registering for the credits (TD 9975), and proposed regulations for transferring energy tax credits (REG-101610-23), electing direct pay for the energy credits (REG-101607-23), and electing direct pay for the semi-conductor manufacturing credit under Section 48D (REG-105595-23).
The regulations help clarify how the rules will operate. But, the IRS interpreted some provisions narrowly that may end up restricting transactions. Some of the IRS interpretations that could limit transactions include the following:
- Energy tax credits transferred by partnerships and S corporations are limited to amounts considered “at-risk” to their partners and shareholders under Section 49.
- Purchased credits will be subject to the passive loss limitations under Section 469, limiting their appeal to individuals.
- The IRS will strictly interpret the requirement that tax credits can be purchased only for cash.
- Tax-exempt entities will not be able to enter partnerships for credit projects in which they intend to elect direct refundable payments.
- Tax-exempt entities will not be able to purchase credits and then elect direct payments.
It is important to note that the rules make it clear that purchasers of credits essentially become the taxpayer for purposes of the credit and will be liable for any recapture or any adjustment after an exam. Further, any adjustments will incur a 20% penalty unless there is reasonable cause.
The temporary regulations apply to tax years ending after June 21, 2023. As for the proposed regulations, they do not apply until published as final regulations. But taxpayers may rely on the proposed regulations for tax years beginning after 2022 provided they rely on them in their entirety and in a consistent manner.