The Department of Treasury and Internal Revenue Service are releasing Notice 2024-08926 in the Federal Register on April 30. This Notice reflects the final guidelines for Section 6418 Transfer of Certain Credits available to renewable energy projects under the Inflation Reduction Act (IRA22). Much of this guidance clarifies the previously proposed rules regarding the transfer of clean energy credits.
The monetization provisions under Section 6418 are designed to 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 expected to allow for a simpler and less costly method of directly transferring renewable energy credits (in comparison to tax equity structures), although the process and structure have proven to be a bit more complex and limited than some had hoped.
From our perspective, some highlights in this latest clarification include:
- 48 Credits for Energy Storage: The final rules confirm that the credit can be transferred for energy property, which includes eligible energy storage technology and other energy property.
- 45Q Credit for carbon oxide sequestration: It was confirmed that taxpayers do not need to own every component of a single process train of carbon capture equipment. Additionally, it was clarified that the 45Q credit is available to the taxpayer who “both owns the equipment” and performs carbon oxide sequestration activities.
- 6418(b)(1) Advanced payments relative to Production Tax Credits: The Treasury and IRS did not modify the provisions in response to comments around the nature of advanced payments that might have helped to facilitate more creative PTC structuring.
- 6418(a) Credit Portion: The Treasury and IRS rejected comments requesting the ability to “layer” eligible renewable credits that might have facilitated direct tranching of tax credit instruments and clarified that the tax credits are a “single eligible credit.”
- 6418(g)(4) Progress Expenditures: Taxpayers cannot generate and transfer credits for work-in-progress CapEx (aka “progress expenditures”).
Other Tax Aspects
- Taxpayers must elect to transfer renewable credits in their original tax return for the taxable year for which the credit is generated (including extensions), and can modify, but not introduce, credits in subsequent tax return amendments or adjustments.
- Provisions are provided to help reconcile different tax reporting periods for transferor and transferee taxpayers.
- The guidelines clarified material participation and passive activity nature of the owner and transferee as well as the inability for a transferee to “redetermine [the eligible credits] in connection with an investment activity” at a later date.
Obligations
- The guidelines confirm that the recapture risk for the transferred credits lies with the transferee buyer of the credits.
- The final rules rejected a request to require the taxpayer to identify the buyer transferees in its Transfer Election Statement or elsewhere.
- The final rules reiterate that prevailing wage and apprenticeship recordkeeping requirements remain with the original taxpayers. These requirements are one of the reasons insurance is frequently used in such transfer transactions at present.
- The guidance rejected language that would have enabled more and better-facilitated broker/syndicator activities in this space, including clarifying the second transfer prohibition and noting potential tax consequences of such.
There are various technical conditions in these proposed regulations that affect all participants. As with other incentives under IRA22, we are actively helping our clients incorporate renewable tax credits and incentives with other project financing capital sources, as well as address various reporting and strategic obligations that come with these valuable programs.
For more information, please contact:
Lance Healy | Managing Director, FD Real Asset Advisors
The information in this article was intended to provide general information for individuals and companies interested in the subject matter. It may contain opinions and details which may or may not be indisputable and should not be considered fully exacting or comprehensive in nature. The information herein should not be considered tax, legal, investment or any other advice of any kind.