Regulations address transfers of energy tax credits

In brief

The Inflation Reduction Act of 2022 enacted Section 6417, providing for direct payment of some energy tax credits, and Section 6418, allowing taxpayers to transfer certain energy credits. Sections 6417 and 6418 apply to tax years beginning after 2022.

On June 14 the IRS and Treasury released three regulation packages dealing with direct payment and transfers of energy credits:  temporary regulations requiring taxpayers to register to elect direct payments and transfers, proposed regulations on direct payment under Section 6417, and proposed regulations on transfers under Section 6418. The proposed regulations include the registration rules adopted in the temporary regulations. The IRS also issued FAQs and a fact sheet providing information on the regulations.

The temporary regulations apply to tax years ending on or after June 21, 2023, the date of publication of the regulations in the Federal Register. The proposed regulations would apply to tax years ending after final regulations are published in the Federal Register, but permit taxpayers to rely on the proposed regulations after 2022 in tax years ending before publication of final regulations if they apply the proposed regulations consistently and in their entirety.

Comments on the proposed regulations are due by August 14, 2023. A public hearing is scheduled for August 21, 2023.

This insight discusses the temporary and proposed regulations dealing with transfers under Section 6418. For information on the regulations addressing direct payment, see the PwC Insight Regulations address direct payment of energy tax credits.

For consideration: The Section 6418 provisions provide a mechanism for taxpayers to monetize the benefit of their credits by transferring them. Both transferors and transferees should note the significant eligibility requirements for these credits in the year claimed as well as during recapture periods. These requirements vary significantly based on, among other things, the type of credit, the amount transferred, and the type of transferor and transferee entity. Taxpayers electing to transfer credits need to be familiar with the extent of the information required for registration, making the election, disclosure to the transferee, and reporting the transfer on their return. Transferee taxpayers should analyze the potential consequences of excessive credit transfers and recapture events, information needed to determine credit transfer eligibility, and documentation retention requirements.