US FEDERAL TAX CREDIT SALES
One of the key provisions of the 2022 Inflation Reduction Act passed by President Biden was the ability for entities that do not have Federal tax liability to sell their US Federal tax credits to a buyer for a one-time cash payment. The IRS issued guidance on this legislation in Q2 of last year, and with a full year to install commercial solar and EVFC projects the time has come for developers and other entities without tax liability to monetize their credits.
Inflation Reduction Act
The Inflation Reduction Act authorizes owners of new clean energy infrastructure to monetize nine types of US Federal tax credits through sales to other companies for cash. The tax credits must have arisen in 2023 or later to be sold. The rules for such sales can be found in section 6418 of the US tax code.
The deadline to sell tax credits is at least until year end for the year the seller becomes entitled to a tax credit and probably the due date for filing the tax return for the year. Thus, for example, 2024 tax credits could be sold up until the seller files its 2024 tax return in 2025. The buyer claims the tax credits in its tax year that ends on the same date as the seller’s tax year (or that straddles the back end of the seller’s tax year for buyers with different tax years). The buyer can carry them forward if not used immediately.
The seller must notify the Internal Revenue Service of the sale by filing an “election” with its tax return.
Sellers do not have to report the sales proceeds as income. The buyer cannot deduct its purchase price. Buyers pay less than 100¢ per dollar of tax credit because they need to profit from the transaction.
Nine Tax Credits Eligible For Sale
Nine types of tax credits can be sold. They are tax credits under the following US tax code sections: 45, 45Y, 48, 48E, 45Q, 45V, 45U, 45Z 45X, 48C and 30C. (Although there are 11 sections listed, there are only nine tax credits as two of them move after 2024 to new tax code sections.)
The nine credits are production tax credits for generating renewable or nuclear electricity, capturing carbon emissions or producing clean hydrogen and clean transportation fuels (like sustainable aviation fuel), tax credits for manufacturing wind, solar and storage components or processing, refining or recycling 50 types of critical minerals, tax credits for building new factories and re-equipping existing assembly lines to make or recycle products for the green economy and reduce greenhouse gas emissions at existing factories by at least 20%, and tax credits for installing electric vehicle and other clean fuel charging stations in low-income and rural areas.
Tax credits can only be sold once. Thus, a buyer cannot resell the tax credits it purchases. The buyer must pay cash. The tax credit buyer cannot be related to the seller.
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Want to monetize your 2024 solar, EVFC, or other applicable US Federal tax credit through tax credit sales? Inquire today for a quote from a qualified buyer through the contact us button below!
This blog provides an overview of the tax credit transferability provision of the Inflation Reduction Act. It does not constitute professional tax advice or other professional financial guidance and may change based on additional guidance from the Treasury Department. Please consult a licensed tax professional regarding your organizations specific situation as we are not tax advisers.
