Key PointsChanges enacted as part of the Inflation Reduction Act allow companies to purchase federal energy tax credits from third parties for cash.The success of these provisions, which are designed to streamline monetization of the credits and expand the market of potential participants in energy projects, will depend on the development of a robust transfer market.While certain technical aspects of the credit transfer process are still being worked through, the market has seen an increasing number of tax credit transfer deals since preliminary IRS guidance (88 FR 40496) was issued in June 2023.Companies participating in the credit transfer market are able to obtain tax savings while supporting the development of renewable technologies at a time when public investors and other stakeholders are increasingly focused on companies’ greenhouse gas mitigation and other environmental efforts.The Inflation Reduction Act (IRA) of 2022 reflected a push by Congress and the Biden administration to address climate change by broadening the applicability of tax credits traditionally available for renewable energy to new technologies (such as clean hydrogen and dynamic glass), increasing the value of credits available for other technologies (such as carbon capture), and incentivizing manufacturing of advanced technologies and mining of elements critical to those technologies.The IRA also added provisions to the Internal Revenue Code that, for the first time, made certain federal tax credits associated with energy projects freely transferable to third parties for cas

This past summer, the Treasury and Internal Revenue Service (IRS) published proposed Treasury Regulations (88 FR 40528 and 88 FR 40496) under two key provisions of the Inflation Reduction Act of 2022 (IRA) designed to enable taxpayers and tax-exempt entities to monetize certain energy-related federal tax credits. Section 6417 allows certain tax-exempt and governmental entities that historically could not benefit from such tax credits to receive direct payments from the government in lieu of such tax credits. Section 6418 permits taxpayers to transfer all or a portion of certain energy-related tax credits to unrelated parties for cash. By broadening the universe of organizations that are able to make use of energy-related tax credits through the direct pay provisions and creating a more direct pathway for taxpayers interested in financing energy projects to share credits through transferability, these provisions stand to significantly expand the market for investment in energy projects.This article begins with some background regarding the Direct Pay Rules and the Transferability Rules and provides a summary of certai

Download PDFThe Inflation Reduction Act (“IRA”) included provisions addressing the transferability of clean energy tax credits.Prior to the enactment of these IRA provisions, it was not possible to monetize federal tax credits generated by renewable energy projects outside of tax equity financing structures.The objective of their inclusion included the reduction in transaction costs of monetizing these tax credits in the tax equity market. This would allow additional investors to enter the market which would presumably make it broader and more diverse, enabling projects to be financed more quickly and affordably.The United States Department of Treasury and Internal Revenue Service (collectively, “IRS”) proposed rules addressing these IRA components. See Section 48 Transfer of Certain Credits: 88 Fed. Reg. 40496 (“Proposed Rule”).The American Clean Power Association (“ACPA”) submitted April 14th comments addressing the Proposed Rule.The ACPA describes itself as the leading voice of today’s multi-tech clean energy industry, representing 750 utility-scale solar, wind, energy storage, green hydrogen and transmission companies. Its commitment is stated to include meeting America’s national security, economic and climate goals with fast-growing, low-cost, and reliable domestic power.The primary points raised in ACPA’s comments on the Proposed Rule include:Confirm that transferred credits can be carried forward.Clarify the treatment of transferred credits for estimated tax purposes.Allow grouping of related credit properties and facilities.Allow “bonus” credits to be transferred separately.Provide more flexibility to the cash payment rule to allow pre-sales of credits.Proposed modifications to the registration and information requirements. Expressing concern that the Proposed Rule requires substan

On June 21, 2023, the Treasury Department (Treasury) and Internal Revenue Service (IRS) published proposed regulations (88 FR 40528 and 88 FR 40496) under two key provisions of the Inflation Reduction Act of 2022 (IRA) designed to enable taxpayers and tax-exempt entities to monetize certain energy-related federal tax credits. Section 6417 of the Internal Revenue Code (Code) allows certain tax-exempt and governmental entities to apply to receive direct payments from the government with respect to certain energy-related tax credits. Section 6418 of the Code permits taxpayers to transfer all or a portion of certain energy-related tax credits to unrelated parties for cash. By broadening the universe of organizations that are able to make use of energy-related tax credits through direct pay, and creating a more direct pathway for taxpayers interested in financing energy projects to share credits through transferability, these provisions stand to significantly expand the market for investment in energy projects. Even before the regulations were proposed, these two provisions had begun to generate significant interest in the energy tech