Crux + Vinson & Elkins: Tax Credit Transfers 101: A Guide to the Essential Steps

This how-to guide provides market participants with: (1) a roadmap of how to navigate the pre-filing registration portal; (2) information on how to prepare the Transfer Election Statement and properly account for the tax credit transfer on annual tax filings; and (3) answers to frequently asked questions.

Navigating the pre-filing and registration process

Tax credit pre-filing registration is a requirement for making a transfer of an eligible tax credit. A transfer will not be effective unless the transferor taxpayer (i.e., the seller) receives a valid registration number for each “eligible credit property.” Both the seller and the transferee taxpayer (i.e., the buyer) must include such registration number(s) on the Transfer Election Statement filed with each party’s U.S. federal income tax return.

The Internal Revenue Service (IRS) administers the registration process through its portal and recommends that entities register any facilities for which they intend to transfer (or have transferred) tax credits.  Registration is also required for taxpayers who intend to claim an elective payment (i.e., “direct pay”), however this guide only addresses transfer transactions.

Step 1. Accessing the Pre-Filing Registration portal:

The first step for a project seeking to register its tax credits through the Pre-Filing Registration Portal is to create an account for the transferring taxpayer (more information on determining the transferring taxpayer is included in the FAQ section). Companies must:

• Create an ID.me Account to verify the personal identity of the individual who will be completing the registration for the transferor taxpayer.
• Create a Clean Energy Business Account for the transferor taxpayer (irs.gov/eptregister).
• After registering, users should navigate through the portal by selecting “Applicable Business Online Account”, then select “Get Started” under “Clean Energy and Semiconductor Manufacturers” and select “Register”.

Timing of the registration can be challenging. The IRS only allows one registration package per taxpayer per year to be open and requires that the property/facility be placed in service before the taxpayer completes the pre-registration process. The IRS directs taxpayers to allow approximately 120 days for registration numbers. In practice, this process has often been quicker, but companies may need to correct or amend parts of their filing and should plan for ample time.

So far, the registration portal has been made available on a yearly basis — opening in the fourth quarter of 2023 for credits generated in 2023 and in the third quarter of 2024 for credits generated in 2024.

There are several points that companies should be aware of to ensure that their applications are timely and successful:

• The application will include both general information about the registrant and specific information on the eligible credit property and eligible credit intended to be claimed
  • Supporting documentation may also be required to establish that the taxpayer is entitled to the credit
• Registration must be done for each energy property or facility (e.g., for a wind PTC, that means a separate registration number is required for each wind turbine)
  • In certain circumstances, a taxpayer may be able to elect to register a project instead of each energy property or facility
  • A bulk upload method is available for taxpayers who want to register multiple facilities
• Only one registration package per taxpayer per year is allowed to be open at any given time, so companies with portfolios of projects that submit a package of projects for pre-filing must wait for the registration package to be returned by the IRS in order to change or add to it
• The registration number is valid for only one taxable year
• Receiving a registration number is not a guarantee or confirmation that a credit is available or that it will not be later audited by the IRS

Step 2: Preparing the Transfer Election Statement

The Transfer Election Statement is a statement that describes the transfer of a credit between a seller and a buyer. It must be attached by both the seller and the buyer to their respective tax returns.

According to Treasury’s final regulations governing the transfer of clean energy tax credits, the following information must be included on a Transfer Election Statement for each piece of energy property/facility:

• A heading labeled “Transfer Election Statement”
• General information related to the seller and buyer (i.e., name, address, and taxpayer identification number)
• Information about the “specified credit portion:”
  • Identification of the eligible credit
  • Total credit amount determined for the eligible credit property or facility for the relevant year
    • For multiple facilities, you may need to separately determine the amount of credit generated by each facility (e.g., determine electricity produced and sold by each wind turbine within a wind project and the PTCs generated by each such turbine)
  • Amount of the credit being sold
    • Multiple credit transfer elections with respect to a single credit property or facility are permitted, so long as the aggregate transfer amount does not exceed the amount of the credit
  • Seller’s taxable year and first taxable year the specified credit portion will be taken into account by the buyer
  • Amount of cash consideration paid for the credit and payment date(s) (which must be no earlier than the first day of the year the credit is generated and no later than the earlier of the seller’s or buyer’s tax return filing)
  • Registration number(s) related to the eligible credit property(ies) or facility(ies)
• An attestation that seller is not related to buyer
• A representation from the seller that it has or will comply with all relevant requirements to make a transfer election, including the Internal Revenue Code (and Treasury Regulations thereunder) provisions applicable to the eligible credit
• For ITC projects, a statement from the seller and the buyer acknowledging the notification of recapture requirements under the Code (and Treasury Regulations thereunder)
• A statement from the seller that it has provided the required minimum documentation to the buyer

Beyond what is outlined in the above requirements, the form of a Transfer Election Statement is not explicitly dictated in the Treasury Regulations.  As a result, opinions among counsel and accounting firms differ on whether a separate signed Transfer Election Statement is required for each energy property or facility, or if a schedule listing multiple eligible credit properties with registration numbers can be included in a single Transfer Election Statement.  Some accounting firms also have preferred forms of transfer election statements that they may require their clients to use.

In order to ensure timely filing, the Transfer Election Statement must be completed before the earlier of when the seller or buyer files its tax return — meaning that the seller must have received the registration number(s) associated with the transferred credits before this date.

Step 3. Other Required Tax Forms and Filing

In addition to completing the pre-filing registration process and preparing the Transfer Election Statement, sellers will have several other tax filing requirements to ensure a successful tax credit transfer.

A transfer election must be made as part of the annual (or short period) tax return filed before the due date (including extensions) for both the seller and buyer. The IRS has been clear that the transfer election cannot initially be made on an amended tax return for the seller. Once a return is filed, a taxpayer typically cannot change (or add) a credit transfer, but may be able to make corrections for typos.

Timing of tax return filing in the context of a transfer deal

A corporate taxpayer is required to file its annual tax return by the 15^th day of the fourth month following the close of its taxable year (e.g., April 15 for calendar year corporate taxpayers). Partnerships (including multi-member LLCs) and S-Corps typically have a filing deadline of March 15, unless they operate on a fiscal year, in which case, the filing deadline will be the 15^th day of the third month following the close of their taxable year. However, corporate and partnership taxpayers usually extend their filing deadline until the ninth or tenth month following the close of their taxable year (i.e., September for calendar year partnerships or October for calendar year corporations).

When filing the tax return, both the seller and the buyer participating in a tax credit sale transaction must include the following documents:

• IRS Form 3800 (General Business Credit Form), including the registration number(s)
  • A schedule attached to Form 3800 showing the amount of the eligible credit transferred for each eligible credit property
• The Transfer Election Statement described in Step 2
• With respect to sellers, the relevant source credit form for the eligible credit which includes the registration number and any necessary attachments (see Source Credit Forms below from IRS Publication 5884 – Table 2)
  • A separate credit source form may be needed for each credit property or facility
  • Attachments may include, among others:
    • An “Increased Credit Amount Statement” signed under penalty of perjury by a transferor taxpayer that the property or facility qualified for the full credit amount (e.g., confirming the “prevailing wage and apprenticeship requirements” have been satisfied); or
    • A “Domestic Content Certification Statement” signed under penalty of perjury by a transferor taxpayer if the domestic content bonus is claimed.

Frequently Asked Questions:

Who may sell tax credits?

Generally, any US taxpayer which is otherwise eligible to claim certain clean energy incentives, except for certain tax-exempt, not for profit, or governmental organizations.

Who may buy tax credits?

Generally, any US taxpayer which is unrelated to the credit seller and which has a tax liability that it may offset with purchased tax credits. Corporations are presumed to be able to use tax credits towards their federal tax liabilities. Passive activity rules govern whether partnerships, S-corps, and individuals may use tax credits against their tax liabilities.

Who is the “transferor taxpayer”?

The transferor taxpayer (the taxpayer entitled to sell tax credits) is generally the regarded taxpayer (for U.S. federal income tax purposes) which would otherwise be able to claim the tax credit as a credit against its tax.

If a C corporation directly holds a facility or property for which an eligible credit is determined, the C corp is treated as the “transferor taxpayer” and the election to transfer an eligible credit is made at the C corp level.

If a partnership or an S corporation directly owns a facility or property for which an eligible credit is determined, the partnership or S corp is treated as the “transferor taxpayer” and the election to transfer the eligible credit is made at the entity level, not by the individual partners or shareholders. Put differently, if a partner wants to transfer credits that would otherwise be allocated to the partner, the partner must direct the partnership to effectuate the transfer.

If the property is held by an entity that is disregarded for U.S. federal income tax purposes (i.e., a disregarded entity (typically, a single member LLC that has not elected to be taxed as a C corp)), the first taxable entity up the chain of ownership that is regarded for U.S. federal income tax purposes is treated as the “transferor taxpayer.”

The transfer election would be made in connection with a C Corp’s annual Form 1120, a partnership’s annual Form 1065, or an S Corp’s annual Form 1120-S, as applicable.

Is a pre-filing registration number required to transfer credits?

It is not a requirement that a transferor taxpayer/seller obtain a pre-registration number prior to entering into an agreement to sell tax credits to a transferee taxpayer/tax credit buyer. However, buyers and sellers of tax credits must file a Transfer Election Statement with their annual tax filings, and must obtain a pre-filing registration number in order to complete the Transfer Election Statement.  As such, some parties may negotiate for a registration number to be received by a particular date or milestone.

Is obtaining a pre-filing registration number a condition to funding in a tax credit transfer deal?

The pre-filing registration portal has not historically been open for applications for much of the year, so projects placed in service before the portal is open have often been funded without the pre-filing registration number being generated. However, some parties may require that a registration number be received by a particular date or milestone.

Is the pre-filing registration portal open for projects transferring 2024 tax credits?

Yes, the pre-filing registration portal is now open for taxpayers electing to transfer tax credits generated in 2024.

How long does it take to obtain a pre-filing registration number?

The IRS encourages applicants to allow 120 days to obtain a pre-filing registration number, but, in practice, the time period required to receive the registration number tends to be much less (typically, around six weeks). However, applicants are regularly asked to amend their registration application or correct missing/inaccurate information. Any amendments required can extend the time required to obtain the pre-filing registration number (though the IRS has indicated that timely amendments may not result in the applicant losing its place in the queue).

What happens to a tax credit if the taxpayer does not receive a pre-filing registration number before the tax filing deadline?

The IRS has made accommodations for applicants that need to obtain a pre-filing registration number quickly. The IRS has a priority contact email (irs.elective.payment.or.transfer.of.credit@irs.gov) that parties can reach out to if they are approaching the tax filing deadline and have not received their pre-filing registration number. This priority channel should not be relied on, but it may help a taxpayer receive its pre-filing registration number on an expedited basis under certain circumstances.

How are buyers of tax credits able to protect themselves if a seller fails to obtain a pre-filing registration number?

Typically, sellers of credits will provide a covenant to obtain a pre-filing registration number by a certain date or milestone. In that way, the failure to obtain the pre-filing registration number would constitute a violation of the deal covenants (i.e., the same indemnification or remedies that are applicable to all other covenants of the seller would be available to the buyer).

Can project developers bundle their projects together under one pre-filing registration number?

Each piece of energy property or facility generally must obtain a pre-filing registration number. However, the IRS allows applicants to batch a portfolio of energy facilities together when making their application for pre-filing registration and in some circumstances allows multiple energy properties to be combined as a single “project” and receive one registration number.

How many projects / pieces of energy property can be registered at one time?

There is no limit to the number of projects that can be included in a pre-filing registration application. However, a taxpayer may only have one open application at any one time and cannot include additional projects until the application has been returned to the taxpayer.

Can a buyer and seller list multiple projects / pieces of energy property on one transfer election statement?

There is no definitive answer as to whether individual transfer election statements are required for each piece of energy property/facility or whether a portfolio of projects can be packaged together on a single Transfer Election Statement and different advisors take different views of the question. The IRS requires that the Transfer Election Statement include, at minimum, the following information for each piece of energy property/facility:

1. 1. Identification of the eligible credit
   2. Total credit amount determined for the eligible credit property or facility for the relevant year
   3. Amount of the credit being sold
   4. Transferor taxpayer’s taxable year and first taxable year the specified credit portion will be taken into account by the transferee taxpayer
   5. Amount of cash consideration paid for the credit and payment date(s) (which must be no earlier than the first day of the year the credit is generated and no later than the earlier of the transferor or transferee filing its tax return)
   6. Registration number(s) related to the eligible credit property(ies) or facility(ies)

Does the IRS validate credits that receive a pre-filing registration number?

No. The receipt of a pre-filing registration number does not mean that a project is eligible for a certain tax credit, that such project’s tax credits are properly calculated, or that the tax credit will not be subject to audit. Buyers must conduct their own due diligence on the tax credits they purchase.