In this two-part series, ARB explores how the Inflation Reduction Act of 2023 (IRA) has affected the monetization of clean energy tax credits. In part one, we looked at the buyers’ perspective. Here, in part two, we present information for sellers.
Part Two: Sellers
IRA has enacted two significant new ways to monetize federal tax credits generated from clean energy projects, regardless of the taxpayer’s tax-paying status. Before the IRA, only businesses or individuals with federal tax liabilities could benefit from these tax credits.
Direct Pay Election
Under the new Internal Revenue Code section 6417, eligible parties can elect to receive a refund equivalent to their clean energy tax credits, even if they have no tax liability. This option is available to tax-exempt organizations, state and local governments, municipalities, Native American tribes, rural electric cooperatives, the Tennessee Valley Authority, and Alaska Native Corporations. Exceptions allow any taxpayer to elect Direct Pay for credits under sections 45Q (carbon capture), 45V (hydrogen), and 45X (advanced manufacturing), limited to the first five years of the credit period. This election aims to ensure that entities without tax obligations can benefit from incentives for clean energy investments, boosting projects in hydrogen, carbon capture, and advanced manufacturing.
Credit Transfers (Sales of Credits)
Introduced by Code section 6418, starting in 2023, taxpayers can sell clean energy tax credits to unrelated parties for cash. Only current-year credits are transferable, and the transferee must recognize the tax credit in their first taxable year ending after the transferor’s taxable year in which the credit was determined. Transferability is restricted to one transfer per credit. The IRS determines unrelated party status based on ownership tests. Tax-exempt entities eligible for Direct Pay cannot sell tax credits. Section 6418(g)(2) imposes penalties for excessive credit transfers, where credits claimed exceed allowable amounts. Risks such as recapture of credits, applicable to section 48 (investment tax credit for energy property) and section 45Q (carbon capture) credits, must be addressed in credit sale agreements, detailing indemnities for potential liabilities.
Market for Credit Sales
Anticipated markets, including online platforms and brokerage services, are expected to develop to connect credit buyers and sellers. While currently immature, these markets may become more structured over time, potentially establishing market prices or standard discounts for credits. However, credits cannot be re-traded after initial transfer, limiting the development of a secondary market. Permitting credit transferability is poised to broaden investor interest and diversify financing options beyond traditional tax equity methods.
The Inflation Reduction Act has revolutionized clean energy tax credit monetization, offering sellers a range of methods to extract value irrespective of the taxpayer’s tax-paying status. By embracing innovation, market diversification, and strategic partnerships, clean energy tax credit sellers can unlock new opportunities and drive sustainable growth in the clean energy tax credit sector.
For personalized guidance and to make the most of these opportunities, consult a financial advisor who specializes in clean energy tax credits and can provide expert advice tailored to your specific needs.
John Hadwen joined ARB in 2021 as a tax director. He specializes in providing individuals and businesses with comprehensive tax compliance and consulting services related to closely-held business, manufacturing, construction & real estate, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.
