Energy Credit Transferability Regulations Finalized

The most notable aspect of the Final Transfer Regulations is how little was changed from the temporary and proposed regulations released in June 2023 (the “Proposed Regulations”). In the preamble to the Final Transfer Regulations, Treasury and the Service describe a variety of taxpayer concerns and requests for clarifications received in connection with the Proposed Regulations but, with some exceptions, generally declined to provide further guidance.

Certain of the more significant clarifications and updates (or lack thereof) included in the Final Transfer Regulations are described below. Stay tuned for a separate alert regarding the impact of the Final Transfer Regulations on real estate investment trusts.

• Permitting Corrections and Limited Updates on Tax Returns
  • Permits corrections to numerical errors on an amended return or administrative adjustment request, so long as the change is to a substantive item (that is, a taxpayer may not correct a blank item or an item that is described as being “available upon request”).
    • If the amount of the eligible credit is changed, increases may not be transferred, but decreases to the credit must be reflected.
  • Confirms that the registration number must be included on both IRS Form 3800 and any required source credit form(s) with respect to the eligible credit property.
• Cash Payments
  • Continues to disallow advance payments. Certain comments, particularly with respect to PTC projects, requested advance payments for future credits on projects, but the preamble to the Final Transfer Regulations provided that this would create an administrative and legal burden.
  • Did not address the treatment of transaction costs such as legal and consulting fees, tax insurance, indemnity payments, or success-based fees as they provided these costs are beyond the scope of the transfer regulations (but may be considered in connection with other rulemaking).
  • In the event of an excessive credit transfer, the eligible taxpayer would be required to treat the portion of purchase price attributable to the excessive credit transfer as taxable, but added that the transferee taxpayer would be entitled to deduct the payment (with the character of the deduction determined under general income tax principles).
  • Included a provision that an eligible taxpayer is not subject to the normalization rules with respect to any cash consideration paid by a transferee taxpayer for a specified credit portion.
• Timing of Transfer
  • Clarifies that a transfer election is not made until all of the requirements set forth in Treasury Regulation §1.6418-2(b) are satisfied. In other words, until the election is actually made in connection with a filed tax return, the transfer has not occurred (relevant for purposes of ensuring the “no secondary” transfer is satisfied).
• Definitions of Eligible Taxpayers and Eligible Credit Properties
  • Largely adopts the Proposed Regulations’ definition of eligible credit property, but for purposes of credits under Code section 45Q, corrects the definition of eligible credit property to be a component of carbon capture equipment within a single process train, rather than an entire single process train.
  • Added a provision that if an eligible taxpayer is a grantor (that is, an owner of any portion of a trust under Code section 671), then the eligible taxpayer may make a transfer election for any eligible credits determined with respect to eligible credit property held directly by the portion of the trust that the eligible taxpayer is treated as owning under Code section 671.
  • Modifies the rule that an eligible taxpayer must own the underlying eligible credit property and conduct the activities giving rise to the credit, except in the case of Code section 45X in which the eligible taxpayer only needs to conduct the Code section 45X activity.
• Code Section 469 Limitation
  • Despite comments requesting various limitations or exceptions to the application of Code section 469 to transferred credits in order to expand the universe of transferee taxpayers, the preamble to the Final Transfer Regulations notes both a desire to align with the statutory language and a concern regarding potential fraud as its bases for doubling down on the application of Code section 469 to transferred credits in the Final Transfer Regulations.
• Recapture
  • Provides that if the eligible taxpayer retains some of the credit amount, any recapture liability (but not excessive credit transfer liability) will be shared proportionately between the eligible taxpayer and the transferee taxpayer(s).
• Vertical vs. Horizontal Slices
  • Retains the rule that an eligible taxpayer may only transfer a “vertical slice” of the eligible credit and is not allowed to sever any bonus credits from the base credit (i.e., transfers of “horizonal slices” are not permitted). As described in the preamble to the Final Transfer Regulations, Treasury and the Service viewed this rule as necessary to limit the administrative burden on the eligible taxpayer and government to track the separation of the credit.
• Diligence / Required Minimum Documentation
  • Refused to provide more detail regarding the required minimum documentation required to be provided to transferee taxpayers, stating in the preamble to the Final Transfer Regulations that it was subject to a facts and circumstances determination and noting that Code section 6418 “specifically places a due diligence responsibility on the transferee taxpayer.”
• Estimated Tax Payments
  • Confirmed in the preamble to the Final Transfer Regulations that buyers of credits may reflect credits they intend to purchase in estimated tax payments, but declined to provide more specific rules (noting in the preamble that such a rule is “unnecessary”).
• Registration
  • Generally adopted the temporary and Proposed Regulations governing pre-filing registration and noted that it would consider ways to streamline the registration portal for taxpayers registering credits for multiple properties or facilities.

*Trey Frye is a law clerk in our New York office.

¹ The transfer election was enacted as part of the Inflation Reduction Act of 2022 (the “IRA”), which provided that, for taxable years beginning after December 31, 2022, “eligible taxpayers” could elect to transfer all or a portion of certain tax credits to an unrelated taxpayer in exchange for cash. “Eligible taxpayers” are essentially all U.S. taxpayers that are not “applicable entities” as defined in Code section 6417(d)(1), and include taxpayers that have U.S. employment tax or excise tax obligations even if they do not have a U.S. income tax obligation.

The tax credits generally eligible to transfer include: the alternative fuel vehicle refueling property credit (Code section 30C); the production tax credit (“PTC”) (Code section 45) for facilities originally placed in service after December 31, 2022; the carbon oxide sequestration credit (Code section 45Q) for facilities originally placed in service after December 31, 2022; the zero-emission nuclear power production credit (Code section 45U); the clean hydrogen production credit (Code section 45V) for facilities originally placed in service after December 31, 2022; the advanced manufacturing production credit (Code section 45X); the investment tax credit (“ITC”) (Code section 48); the technology neutral ITC (Code section 48E) and PTC (Code section 45Y); the clean fuel production credit (Code section 45Z); and the qualifying advanced energy projects credit (Code section 48C).

The Final Transfer Regulations are effective 60 days after publication in the Federal Register (expected April 30, 2024).

² Our prior coverage of the transfer election introduced in IRA can be found here (see “5. Credit Flexibility”) and here.