On June 14, 2023, the IRS released proposed regulations, temporary regulations, and FAQs to address questions regarding the elective payment election and transfer of credits under the Inflation Reduction Act of 2022 (IRA) and the CHIPS and Science Act of 2022 (CHIPS Act).
As a reminder, the IRA was enacted on August 16, 2022. This bill encourages innovation in the renewable and clean energy economy. One of the IRA’s provisions was to allow tax-exempt organizations (known as applicable entities for purposes of Internal Revenue Code (IRC) Sections 6417 and 6418) exempt under §501(a) (in addition to state and local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives) to claim these credits under an “elective payment” (IRC §6417) method and allow other entities a “direct transfer” (IRC §6418) of these tax credits.
Direct Pay (IRC §6417)
Proposed regulations under §6417 of the IRC relate to the elective payment of certain credits for applicable entities. Applicable entities (which include those tax-exempt organizations listed above) that earn any one of 12 clean energy credits can make an elective payment election and have the amount of the credit treated as a payment against tax. If the applicable entity has no tax (or is not even usually required to file a tax return), it may receive these credits as a refund. The applicable credits are as follows:
- Section 30C: Credit for Alternative Fuel Vehicle Refueling/Recharging Property
- Section 45: Renewable Electricity Production Credit
- Section 45Q: Carbon Oxide Sequestration Credit
- Section 45U: Zero-Emission Nuclear Power Production Credit
- Section 45V: Clean Hydrogen Production Credit
- Section 45W: Commercial Clean Vehicle Credit
- Section 45X: Advanced Manufacturing Production Credit
- Section 45Y: Clean Electricity Production Credit
- Section 45Z: Clean Fuel Production Credit
- Section 48: Energy Credit
- Section 48C: Qualifying Advanced Energy Project Credit
- Section 48E: Clean Electricity Investment Credit
In addition, partnerships or S corporations can elect to be treated as an applicable entity for the limited purpose of making an elective payment election under §6417, but only for 45Q, 45V, and 45X credits. The election, if made, is applicable for the current year plus the next four years ending before January 1, 2033. This election can be revoked, but the entity cannot re-elect after revoking.
The electing partnership or S corp may receive a payment equal to the applicable credit amount. The payment will be treated as tax-exempt income. It is important to note, however, that this is an entity election, not a partner election.
For applicable entities that finance their projects with tax-exempt financing or grants, the proposed regulations offer guidance on how to calculate the applicable credit. The new regulations indicate the applicable credit is reduced when the total of the tax-exempt financing and grants plus the credit exceeds the basis of the tax credit property.
For example, a tax-exempt hospital receives a $300,000 state grant to be used for 45W eligible property. The hospital’s basis in the eligible credit property is $300,000 and the 45W credit is $30,000. Under the proposed regulations, the 45W credit is reduced to zero because the total grant plus the credit is greater than the cost of the 45W eligible property.
Let’s assume the tax-exempt hospital received a $200,000 state grant for 45W property and used $100,000 of its own funds to purchase $300,000 of eligible 45W property. The total 45W credit is $30,000. Since the total grant plus credit is less than the eligible basis, the 45W credit is not reduced and the hospital receives the full credit.
Transferring Credits (IRC §6418)
Under the proposed regulations in IRC §6418, entities that are not applicable entities also can make an irrevocable election to transfer all or a portion of any one of 11 clean energy credits. The credit not allowed under §6418 is the credit allowed under §45W. These credits can be sold for only cash to an unrelated third party (or parties), who will then claim the credit on their tax return. The cash received is considered tax-exempt income to the transferor, and the cash paid is not allowed as a deduction to the transferee. The transferee cannot resell or transfer this credit again. Partnerships allocating the credit to its partners are not considered to be transferring the credit again for purposes of IRC §6418.
Registering the Credits
The taxpayer or applicable entity will need to register their eligible credit property used to claim the credits if they are wanting to transfer or make an elective payment election. The temporary regulations (T.D. 9975) describe the process for how to register to claim these credits under the IRA and CHIPS Act. Taxpayers and applicable entities will need to register via an IRS electronic portal. This portal will ask for the taxpayer’s general information such as name, EIN, tax year, applicable credits intended to claim, and information on each eligible project/property. After the IRS reviews this information, it will provide a registration number. This registration number is valid for only the credit project or property listed in the registration process and is only valid for the tax year. If a project or property is eligible for a credit for multiple tax years, the taxpayer will be required to renew the registration. This electronic portal is not set up as of now, but the IRS plans to have it operational in fall 2023 ahead of the tax filing period for calendar year 2023 tax returns.
The registration number is unique to the credit property used in claiming a credit. For example, if a taxpayer has solar energy property and geothermal property, both properties used under the §48 credit, the taxpayer would get a registration number for each credit property.
After a registration number is received, it will be filed with the entity’s original annual tax return along with any form required to claim the relevant credit, Form 3800, and any additional information required in instructions to the relevant forms. Taxpayers not normally required to file an annual tax return (such as state or local governments) would file a Form 990-T. More information and updated instructions will be coming in future months.
Taxpayers looking to sell their credits will still complete the registration process and obtain a registration number. They will give their registration number to the entity (or entities) purchasing their credit. The transferee will attach a statement to their return identifying the transferor and transferee, type and amount of credit transferred, cash paid, and registration number. The transferor also will attach the statement to their tax return to identify the transferee. For more details on what needs to be provided in the transfer statement, see proposed regulations 1.6418-2(b)(5).
If you’re not planning to transfer credits or use the elective pay election, there’s no need to register. The applicable credits can be used or passed through to partners or shareholders as usual.
In addition, the IRS posted some FAQs on these proposed regulations. The FAQs address some of the key items from these proposed regulations in an easy-to-read format that provide quick answers to some key items that taxpayers and professionals alike have been asking.
For the CHIPS Act, the IRS and Treasury also released proposed regulations (REG-105595-23) that address the elective payment for the Advanced Manufacturing Investment Credit, §48D. This credit is for investments into a qualifying advanced manufacturing facility. The proposed regulations provide guidance on making an elective payment election. The proposed regulations are similar to those outlined above for §6417 but are more specific to the §48D credit.
For applicable entities looking to finance credit projects with tax-exempt funding, a portion of the funding should come from nontax-exempt sources to allow for the applicable entity to claim a credit on the investment.
An election under §6417 may not be made with credits transferred under §6418. If you're contemplating purchasing credits under §6418, it's important to confirm that those credits can be properly used under the applicable code sections (IRC 38/49/469) by the entity that purchased those credits.
If a credit is being transferred under §6418, the statement should be completed before filing either the transferor’s or transferee’s tax return. It would be a best practice to complete and agree to this statement together when finalizing the details of the sale of the credit. This should help remove any confusion when the transferee and transferor file their respective tax returns.
It’s important to note that obtaining the registration number from the IRS does not mean that the taxpayer is eligible to receive the credit; it’s simply a mechanism for the IRS to track these credits. It’s important to have and maintain appropriate documentation for all credits claimed.
The proposed regulations provided some much-needed clarification for applicable entities and others looking to receive payment for their credits or transfer them for cash. While not everything has been finalized, the guidance issued provides a clearer path forward for organizations as they begin to invest in projects that qualify for these credits. We anticipate additional guidance from IRS this fall as it unveils its online registration portal.
If you have any questions about these proposed regulations, please reach out to a professional at FORVIS or use the Contact Us form below.