On June 14th, Treasury issued its draft guidelines on transferability (as well as direct pay). These draft guidelines are a key step toward accelerating transfers by clarifying norms for transactions. Treasury also posted a FAQ on transferability on the IRS’s website
Taxpayers may follow the proposed guidelines until final guidelines are published, and the expectation is that the proposed guidance will largely mirror the final guidance. Final guidelines will be published following a public hearing process taking place in August 2023.
The guidance is in-depth, and below we highlight some of the sections that speak to early questions we’ve heard as we’ve engaged with buyers, sellers, and the wider ecosystem of lawyers, insurers, and accountants.
Buyer Eligibility
The buyer of a tax credit will apply the rules that apply in their particular circumstances, for example sections 38 or 469 (p 28 – 30). Section 469 applies passive activity loss rules to certain buyers (e.g., LLCs, closely-held c-corps, and non-corporate persons). The buyer of a credit is not considered to have owned an interest in the project at the time the work was done (as required for material participation).
Impact: Corporations remain the likely buyers of tax credits, and there is no clear path for LLCs to apply the tax credits to non-passive activity income.
Buyer Protection
The guidance is clear that tax credit buyers will be able to either contract away tax credit risk due to actions of the seller of the credit through legal terms and conditions (indemnities) or through insurance. An insurance market for these risks is developing. (p 48)
Impact: Insurance and indemnities remain key on transactions, as buyers will bear recapture risk for purchased credits.
Credit Provenance
The guidelines make clear that a credit registry is upcoming. Sellers of credits must pre-file and obtain registration numbers per asset that is eligible to sell credits (p 56, 97-98). The system will require updates year-on-year for projects that generate credits over the course of their life.
Impact: Buyers will have greater certainty about the validity of credits through this system, and Common Forge is working to ensure compliance with this system as it emerges.
Buyer Tax Impact
There is no gross impact to the buyer of a tax credit due to claiming a transferred tax credit, even if the cash paid for the credit is less than the value of the tax credit transferred. Buyers of credits will not be subject to taxes on the savings due to a tax credit purchase. (p 83)
Impact: The tax credit’s benefit is not reduced by taxes levied on the financial benefit to the buyer.
Transaction Timing
The tax credits must be transferred on the earlier date of (i) the seller’s tax filing for the credit year or (ii) the buyer’s tax filing for the credit year. (p 19) Tax credits may be applied to estimated quarterly tax payments (IRS FAQ).
Impact: This information helps clarify the latest purchase date, but transactions will likely take place around the time a facility is placed in service. The ability to apply tax credits to estimated quarterly tax payments will accelerate transactions.
Divisibility of Credits
The initial regulation around transferability indicated that tax credits could be sold to multiple counterparties, and the proposed guidelines have confirmed that point. This is a significant win as it allows for a larger variety of buyers to participate in tax credit purchases. (p 12)
Impact: Multiple companies can buy credits from a single project, creating a need for systems to track credits sold and ensure no project sells more than the credits it generates.
Bonus Credit Transactions
Projects are eligible for a variety of credits – (e.g., base, prevailing wage & apprenticeship, energy community, and domestic content). The credits per category cannot be individually sold. Instead, all credits are sold and the recapture of credits due to an event impacting one of the categories proportionately impacts all credits sold. (e.g., if 25% of a project’s tax credit value is tied to one category of credits that are recaptured, 25% of all credits sold are recaptured) (p 11)
Impact: Buyers of credits and sellers of credits cannot transact for credits generated by a specific adder, instead they transact for credits that contain all of a project’s adders. This streamlines sales of and accounting for credits to some extent as all tax credits own the same share of tax credit adders.
Filing Mechanics
The guidelines clarify at least four pieces of information required for a buyer to file a tax credit. The information includes IRS Form 3800 for General Business Credits (p 75), a Transfer Election Statement (p 75) which describes the transfer of a specified credit portion between a buyer and a seller. Both the buyer and the seller must attach the form to their tax returns.
Impact: By year-end, there will be a structured process that accountants and corporations will be able to use to file returns inclusive of credits purchased.
Next Steps
Over the next two months, intervenors will submit comments to Treasury to help move the proposed guidelines to final.
The timing of these guidelines and the proposed ones gives buyers and sellers a path to transfer credits by year-end, establish norms for transfers, and begin to accelerate renewables buildout through this important new financing mechanism.
Reach out to Common Forge to learn more about how your organization can reduce its tax expense through our transferability platform.