April 30, 2024

Final Transferability Regulations Preserve Status Quo Set By June Guidance

The IRS and Treasury published final transferability regulations on April 30 that maintain the status quo.

On April 25, the Treasury and IRS published final regulations for the Inflation Reduction Act’s tax credit transfer mechanism. The IRS also published a press release and updated their transferability FAQs.

The final regulations carried few surprises – other than, perhaps, arriving earlier than some market participants predicted – and preserved the status quo set by the June 2023 guidance.

At Reunion, we welcomed this "non-event" and the clarity it provided, and wanted to highlight several key consistencies.

Highlights from the final regulations

Individuals, trusts, estates, and closely held C corporations remain largely on the sidelines

Despite “many comments” calling for a change, widely held C corporations will remain the primary buyers of transferable tax credits. While this decision will likely decrease overall liquidity in the tax credit market, it will also limit the potential for fraud and abuse.

Passive activity rules generally limit individuals, trusts, estates, and closely held C corporations to applying transferable tax credits to passive income – not active income. The final regulations did not adjust this stance. (However, a potential exception exists for certain closely held C corporations, which allows them to offset active income with tax credits.)

Deprecation cannot be transferred

The IRS did not change its stance on depreciation. As the FAQ states, “Only a taxpayer that has an ownership interest in the project may claim tax depreciation. Transferability does not allow depreciation benefits to be transferred.”

Bonus credits cannot be sold separately

The IRA created three bonus, or adder, credits, which can increase the value of a clean energy project’s tax credits:

  • Energy communities
  • Low-income communities
  • Domestic content

The Treasury’s June guidance stated that bonus credits cannot be sold separately from a project’s other credits. A developer cannot, in other words, sell its base credits to one company and its bonus credits – perhaps at a different price per credit – to another company.

Instead, all credits must be sold as “vertical slices” and be pari passu to one another. In practice, if a single project has multiple buyers for its credits, all buyers have the same risk exposure.

April’s regulations did not change the Treasury’s position. 

The "intends to purchase" provision remains unchanged

Tax credit buyers can still "take into account a specified credit portion that it has purchased, or intends to purchase, to calculate its estimated tax payments." Of course, buyers remain liable for any underpayments.

The regulations clarified that the "intends to purchase" language "illustrates that all the requirements of proposed §1.6418-2(b) do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations."
Generators of §45X, §45V, and §45Q credits can make facility-specific elections for transferability or direct pay

An advanced manufacturer’s decision to use transferability or direct pay to monetize their §45X tax credits need not be binary. If a manufacturer has multiple facilities, they can make the transferability-or-direct-pay decision at the facility level. If a manufacturer only has one facility, however, their decision is binary.

The same optionality holds true for the §45V PTC for clean hydrogen and §45Q PTC carbon capture, although the timing of the election varies by credit:

  • §45V PTC: The direct pay/transfer election is made during the taxable year the qualified clean hydrogen production facility is placed in service
  • §45Q PTC: The direct pay/transfer election is made during the taxable year the “single process train” is placed in service 
  • §45X AMPC: The direct pay/transfer election is made during the taxable year in which eligible components are produced

Importantly, because the §45X election is made during the taxable year in which an eligible component is produced, production facilities that predated the IRS may be eligible for the credit.

Advanced cash payments for multi-year PTCs are not permitted – but borrowing against expected future tax credit payments is permitted

Although “upfront payments for PTCs determined in future taxable years are standard in tax equity transactions,” the final regulations stated that transferred PTCs must be paid for in cash one year at a time. This holds true for ten- and 12-year PTCs. 

Permitting advanced payments would “raise several complex legal and administrative issues, such as whether an excessive credit transfer has occurred or if the eligible taxpayer has gross income if prepaid eligible credits were not transferred in a later tax year."

On an encouraging note, the final regulations specifically state that “there is no prohibition on either a transferee taxpayer” – that is, a tax credit buyer – “or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement.” 
Intermediaries can serve as brokers but not dealers

The final regulations, unsurprisingly, left unaltered the assumed role of tax credit intermediaries (like Reunion) in the transferability market. Intermediaries can serve as brokers and facilitators in tax credit transfers, helping to match and advise buyers and sellers. 

Intermediaries cannot, however, serve as dealers, effectively taking ownership of a tax credit with the intent of transferring/selling it again. 

“Required minimum documentation” remains the same

The final regulations acknowledge calls for an increase to the amount of required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer to make a valid transfer. 

Nonetheless, the Treasury and IRS left the required minimum unchanged. Perhaps as a nod to the validity of increasing the required minimum, the final regulations remind market participants that, “...while the required minimum documentation requirements are the same for all taxpayers, any particular agreement between an eligible taxpayer and transferee taxpayer may go beyond the required minimum documentation based on the arrangement of the parties. The proposed regulations allowed sufficient flexibility for market participants to determine if more information is necessary in a particular transaction, while balancing the burden of producing the required minimum documentation required to make a transfer election.”

The final regulations also remind market participants that "§6418(g)(2)(B) specifically places a due diligence responsibility on the transferee taxpayer."

Improvements likely coming to the pre-registration portal

The IRS opened the tax credit pre-registration portal in December to significant fanfare. But, as with any brand-new IT system, there have been calls for improvement.

While the IRS would not commit to set application review times, it left the door open to "continue to review the efficiency of the registration portal, including functionality responses from the public, to determine whether changes should be implemented or whether additional guidance or publications should be issued."

Plenty more guidance to come in the next 20-ish business days

In Norton Rose Fulbright’s annual Cost of Capital call, the panelists aptly brought attention to the Congressional Review Act, which “is a tool Congress can use to overturn certain federal agency actions.”

With respect to the Inflation Reduction Act, an incoming Congress (backed by a Trump administration) could use the CRA to unwind IRA regulations that were issued within 60 legislative days of the previous Congress.  

Although the exact date for the beginning of the 60-day window remains to be seen, it’s potentially in late May or early June. This gives the Treasury and IRS a little over 20 business days to issue a backlog of IRA-related guidance and regulations. 

The IRS 2023-2024 Priority Guidance Plan details what guidance the IRS is prioritizing through the end of the plan year, which is June 30, 2024.

Discuss the regulations with Reunion

Please contact Reunion's transactions team to understand how these final regulations could impact your organization's plans to purchase clean energy tax credits.

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