On Friday, June 14, 2023, the Department of Treasury and the Internal Revenue Service (IRS) published another set of proposed guidelines under the Inflation Reduction Act (IRA22); this time related to the “direct pay” opportunity for certain nonprofit organizations and the new monetization provisions presented in Section 6418 Transfer of Certain Credits.
The monetization provisions under Section 6418 enable eligible taxpayers to voluntarily transfer tax credits to third parties rather than using the credits against their federal income tax liabilities. This provision is anticipated to allow for a simpler and less-costly method of directly transferring renewable energy credits (in comparison to tax equity structures). The proposed guidelines provide a roadmap that has been much anticipated, although arguable present provisions that may be a bit more complex and limited that some had hoped.
From our perspective, some highlights worth noting are as follows:
- Monetization applies to these credits:
- Alternative fuel vehicle refueling property (section 30C credit);
- Renewable electricity production credit (section 45 credit);
- Carbon oxide sequestration (section 45Q credit);
- Zero-emission nuclear power production credit (section 45U credit);
- Clean hydrogen production credit (section 45V credit);
- Advanced manufacturing production credit (section 45X credit);
- Clean electricity production credit (section 45Y credit);
- Clean fuel production credit (section 45Z credit);
- Energy credit (section 48 credit);
- Qualifying advanced energy project credit (section 48C credit); and
- Clean electricity investment credit (section 48E credit).
- Caveat emptor for the credit buyers
- The tax credit buyers are responsible for any reduction or disallowance in the federal credits due to IRS audit and any associated penalties;
- Disallowance or reduction in credit amount can result from factors such as the failure of the project to satisfy eligibility under its identified renewable activity, the tax credit buyer’s form and amount of purchase price for the tax credits, amount of credit claimed, disposition of the project within five years after it is placed in service, etc.
- Buyers will likely seek creditworthy sellers and risk mitigation
- Indemnifications and/or insurance protections are already often utilized and will likely be necessary in many cases to protect the buyers against these risks which are outside of their control.
- Credits can only be transferred once and must be transacted prior to tax year filings (including extensions)
- There is a good deal of reporting and documentation required, including:
- General credit calculations (cost segregation, etc)
- Wage and apprenticeship calculations for labor
- Bonus credit calculation and documentation (domestic content, energy community, etc)
- Proof of project
- Sellers will register the transactions on an IRS electronic portal
These proposed regulations encompass specific technical considerations that impact partnerships, corporations and individuals seeking involvement in tax credit transactions. It is advisable for individuals to seek guidance from their tax professional regarding these conditions, including the treatment of the tax credits for both buyers and sellers.
Despite some of these documentation requirements and limitations on the utility of the credits for individuals, we do anticipate the monetization as being a great financing and revenue enhancement tool for certain renewables projects (perhaps smaller or nonprofit-owned) and manufacturers involved in the energy transition sectors.
For more information, please contact:
Lance Healy | Managing Director, FD Real Asset Advisors