Buying and Selling Transferrable Federal Tax Credits
Whether you are a tax credit seller or a tax credit buyer there are several unanswered questions as to various technical aspects concerning the new federal transferable tax credit system, primarily due to the absence of regulatory guidance by the United States Treasury Department. The Department sought comments to the public via IRS Notice 2022-50, to which we made several comments. Nonetheless, the Section 6418 – the statute that provides providing for the transfer of identified renewable tax credits – does have several rules concerning transfer transactional mechanics. In the sales context, these mechanics are distilled into a purchase agreement that is executed by both the buyer and seller. The purchase agreement governs how the tax credit is to be sold, discusses closing procedures, payment terms and various other significant contractual terms. Administrative processes, yet unpublished by the Treasury Department, will need to be followed in allocating the tax credit from the transferor taxpayer to the transferee taxpayer.
As to when to claim transferred tax credits, the transferee taxpayer who receives the tax credit, must first claim the tax credit in the first year applicable to the transferor taxpayer, which is typically when the underlying renewable energy property has been placed into service or when the property begins to produce clean energy. Thus, for example, if qualified renewable energy property is placed into service in 2023, a transferee taxpayer that purchased the resulting investment tax credit must first claim the tax credit on their 2023 tax return.
A transferor taxpayer can elect to transfer the tax credits as early as February 12, 2023 and no later than the extended date of a transferor’s return, as applicable. Tax credits may only be transferred once and how to make the election is still uncertain although comments have been requested in response to IRS Notice 2022-50. In addition, powerfully, the transferor taxpayer is not taxed on any cash payment made for the tax credit and payment by the transferee is not deductible as a tax payment or other business deduction. The law also contains penalties for overstated credits in the amount equal to the value of the tax credit plus 20% absent reasonable cause for such tax credit overstatement.