IRS releases proposed regulations on transferring certain renewable energy credits
The Department of the Treasury and the Internal Revenue Service (IRS) have recently issued long-awaited proposed regulations addressing transfers of tax credits under the Inflation Reduction Act (IRA). On the same day, Treasury and the IRS issued temporary regulations implementing the registration system for registering a project as a condition to transferring credits associated with the project, which are effective as of June 21, 2023, and also issued temporary and proposed regulations related to refundable (or direct pay) credits. This alert focuses on the proposed regulations related to transfers of credits.
In addition to other key points, these proposed regulations clarify that:
- projects must be registered with the IRS in order for credits associated with such projects to be transferred
- transferees will bear recapture risk with respect to transferred credits and
- credits can only be transferred for cash.
The IRA established or amended a number of renewable energy tax credits and added rules under Internal Revenue Code Section 6418 providing for an election that allows the transfer of certain credits from one taxpayer to another (Transfer Election). Recently, the IRS released a notice of proposed rulemaking and notice of public hearing along with proposed regulations related to the Transfer Election (the Guidance). The Guidance provides important dates, including the deadline for public comments on the proposed regulations and the date and process of the public hearing on the Transfer Election. The proposed regulations provide a description of the Transfer Election, including definitions and special rules for partnerships and S corporations, as well as excessive credit transfers and recapture rules. The proposed regulations also describe the pre-filing registration process that is required to make credits transferable.
Important dates
The Guidance provides that written comments on the proposed regulations must be received by August 14, 2023. A public hearing is scheduled for August 23, 2023, at 10 AM ET.
Taxpayers may request to attend, speak, and provide outlines of topics to be discussed. If no outlines are received by the end of the comment period, the hearing will be cancelled.
Proposed regulations
The proposed regulations are divided into five sections: (1) definitions and descriptions regarding the transfer of eligible credits; (2) rules for making transfer elections; (3) additional rules for partnerships and S corporations; (4) additional information and rules for registering eligible projects; and (5) special rules.
Transfer of eligible credits
An eligible taxpayer may elect to transfer any specified portion of an eligible credit determined with respect to eligible credit property to a transferee taxpayer. The term “eligible taxpayer” is defined as any taxpayer that is not tax-exempt. “Eligible credit” means any of the enumerated credits in the proposed regulations that does not include a business credit carryback or carryforward under Section 49.
The proposed regulations provide that an eligible credit is determined separately for each eligible credit property and includes any bonus credit amounts attributable to such property. “Eligible credit property” is the property as described in the statute creating the relevant credit. Eligible taxpayers may transfer all or a portion of an eligible credit, with such portions defined as the “specified credit portion”. Eligible taxpayers may transfer different portions of an eligible credit to different taxpayers. Such taxpayer receiving the specified credit portion is defined as the “transferee taxpayer.”
Viewing the statute as not providing for such a carve-up, Treasury limited taxpayers from being able to split the eligible credit into the base credit and the bonus credits. As a result, any transfer and retention of credits would consist of a pro rata portion of the base and bonus credits.
Rules for making Transfer Elections
When an eligible taxpayer makes a valid Transfer Election, the transferee identified in such election is treated as the taxpayer for purposes of the Code with respect to the specified credit portion such transferee receives. The proposed regulations make clear that, with the transfer of a specified credit portion, the transferee bears recapture risk and risk of the credit or transfer being deemed ineligible.
An eligible taxpayer may make multiple transfer elections with regard to one or more specified credit portions, provided that each specified credit portion can be transferred only once. This concept is clarified in response to a multitude of comments from stakeholders. In other words, consistent with Section 6418, the proposed regulations do not limit the number of transfer elections or the number of transferee taxpayers for which an eligible taxpayer may make a transfer election.
The transfer election process differs slightly depending on the ownership structure. The proposed regulations outline four different ownership structures and the procedural differences for each. The four ownership structures considered are for (1) disregarded entities; (2) undivided ownership interests; (3) members of a consolidated group; and (4) partnerships and S corporations. The proposed regulations devote an entire section to the election procedure for partnerships and S corporations which is briefly discussed in the next section of this alert.
The proposed regulations also provide circumstances where no transfer election may be made. Those circumstances are:
- When an eligible credit is related to progress expenditures pursuant to rules of Section 46(c)(4) and (d)
- When consideration other than cash is received by an eligible taxpayer
- When the eligible credits are not determined with respect to an eligible taxpayer, such as a section 45Q credit allowable to an eligible taxpayer because of an election made under Section 45Q(f)(3)(B).
Additionally, the proposed regulations provide rules for the manner and due date of making transfer elections. For example, an eligible taxpayer must determine whether a credit is an eligible credit on a property-by-property basis and the Transfer Election must be consistent with the eligible taxpayers pre-filing registration process also outlined in the proposed regulations. The proposed regulations also provide the manner of making a valid transfer election. In order to make a valid election an eligible taxpayer must, as part of filing a return, include:
- A properly completed source credit form for the taxable year the credit was determined
- A schedule attached to form 3800
- A Transfer Election statement
- And any other information related to the election specified in guidance.
The proposed regulations provide a detailed description of what information is required to be in the Transfer Election statement. A taxpayer may use any document such as a purchase and sale agreement that contains the minimum information required by the proposed regulations.
Finally, this section of the proposed regulations provides rules for determining the eligible credit amount, the treatment of payments made in connection with a transfer election, and the transferees treatment of an eligible credit.
The Transfer Election must be made in a timely filed original return (including any extensions), and cannot be made in an amended return and is not eligible for 9100 relief. Given that a Transfer Election must be made for each transferee and each property/facility, there is a heightened pressure on taxpayer’s compliance teams and outside service providers in ensuring the appropriate elections and required information has been included in the returns.
Additional rules for partnerships and S corporations
In addition to the general rules the proposed regulations also provide certain additional rules for partnerships and S corporations. A partnership or S corporation may make a Transfer Election and may also qualify as a transferee. The proposed regulations provide rules applicable to transferor and transferee partnerships and S corporations, rules applicable solely to partnerships, rules applicable solely to S corporations and the manner and due date of the Transfer Election.
Additional Information and registration
The proposed regulations require eligible taxpayers to complete a pre-filing registration process, providing general information about the taxpayer and eligible credit property, and receive a registration number before making the Transfer Election. Eligible taxpayers will complete the process electronically through a portal administered by the IRS. Eligible taxpayers must obtain a registration number for each eligible credit property.
Special rules
Finally, the proposed regulations provide special rules related to excessive credit transfers and recapture events.
The proposed regulations provide an excessive credit transfer tax of the amount of the excessive credit transfer plus 20 percent. Excessive credit transfer is defined as the amount of the transferred specified credit portion claimed by the transferee taxpayer with respect to such eligible credit property for such taxable year, over the amount of eligible credit that would otherwise be allowed under the Code with respect to such eligible credit property for such taxable year.
To illustrate: an eligible taxpayer expects to receive $100 of credit from eligible credit property and transfers a specified credit portion of $80. The eligible taxpayer claims $20 of the eligible credit and the transferee taxpayer claims $80. When it is determined in a later year that the eligible credit property only generated $50 of credit instead of the intended $100, the amount of the credit received by the transferee taxpayer exceeds the total amount of credit otherwise allowable with respect to the eligible credit property by $30. Under these facts the transferee taxpayer will be required to pay the excessive credit amount plus 20% for a total of $36. These rules first disallow the credit to the eligible taxpayer that transferred the eligible credit, up to the amount of the eligible credit retained by the transferor, and then disallows the excessive amount transferred to the transferee taxpayer.
The proposed regulations also provide that the basis deduction and recapture of Sections 45Q(f)(4), 50(a) and (c) and 49(b) apply to the specified credit portion as they would normally apply to an investment credit property that had not been transferred. The transferee bears the burden of recapture for any specified credit portion transferred to it.
How DLA Piper helps
DLA Piper works closely with clients to guide them through the process of claiming and monetizing renewable energy tax credits. Please contact any of the authors of this alert with any questions about this guidance or renewable energy tax credits in general.
