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June 20, 2023

IRS issues much-anticipated proposed rules on transferring renewable energy tax credits

  • The IRS and Treasury Department have released proposed rules answering many questions surrounding energy credit transferability provisions under new IRC Section 6418.
  • The proposed rules lay out the steps to take to transfer a tax credit, along with issues such as which entity is liable if there is a recapture event, the ability to transfer part of the tax credit, examples concerning "excess credits" and how partnerships may deal with tax credit transfers.
  • Temporary rules issued at the same time describe a pre-filing process requiring taxpayers that want to transfer their credits to register with the IRS to obtain a registration number to use in the transaction.

The IRS has released proposed rules (REG-101610-23) on transferring renewable energy credits.

The Inflation Reduction Act added IRC Section 6418, which allows an eligible taxpayer to transfer all or a portion of an eligible credit to an unrelated transferee taxpayer for cash. The provisions were effective January 1, 2023, but many taxpayers have been waiting for more details on how to implement the provisions, which the proposed regulations provide.

At the same time, the IRS released proposed rules (REG-101607-23) on the direct-pay election of applicable energy credits under IRC Section 6417 (see Tax Alert 2023-1102), FAQs on the two options and temporary regulations (TD 9975) on the pre-filing requirements. Taxpayers electing direct pay of the credits under IRC Section 6417 cannot transfer the credits under IRC Section 6418.

The IRS received over 200 comment letters on the IRC Sections 6417 and 6418 provisions in response to a previous request for comments. Written or electronic comments on the proposed rules must be received by August 14, 2023.

The proposed rules would apply to tax years on or after the date the final rules are published in the Federal Register. Taxpayers may rely on the proposed rules for tax years beginning after December 31, 2022, if they follow the proposed rules in their entirety and in a consistent manner.


The IRA allows certain credits to be transferred. Under new IRC Section 6418, an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit to an unrelated transferee taxpayer. The transfer, however, must be purchased with cash, not be included in the seller's income and not be deductible by the transferee buying the credit. Further, the transfer must be a one-time transfer (i.e., the transferee cannot subsequently elect to further transfer any portion of the transferred credit).

The taxpayer must elect to transfer the credits no later than the due date (including extensions) of the tax return for the tax year for which the credit is determined. Any election, once made, is irrevocable.

The transfer election is available for the following tax credits:

  • The IRC Section 30C alternative fuel vehicle refueling property credit
  • The IRC Section 45 production tax credit (PTC)
  • The IRC Section 45Q carbon capture use and sequestration (CCUS) credit
  • The new IRC Section 45U zero-emission nuclear power production credit
  • The new IRC Section 45V clean hydrogen production credit
  • The new IRC Section 45X advanced manufacturing production credit
  • The technology neutral PTC (new IRC Section 45Y) and investment tax credit (ITC) (new IRC Section 48E)
  • The new IRC Section 45Z clean fuel production credit
  • The IRC Section 48C qualifying advanced energy project credit
  • The IRC Section 48 ITC

Elections related to the IRC Section 45 PTC or the credits under IRC Sections 45Q, 45V or 45Y must be made separately for each applicable facility and for each tax year during the 10-year period beginning on the date the facility was placed in service (or, for IRC Section 45Q CCUS purposes, for each year during the 12-year period beginning on the date the carbon capture equipment was originally placed in service at that facility).

The IRA does not allow applicable entities, as defined for direct-pay purposes, to elect to transfer credits. Applicable entities are defined for direct-pay purposes as tax-exempt entities, any state or local governments, the Tennessee Valley Authority, Indian tribal governments or Alaska Native Corporations. An additional 20% penalty can apply to "excessive credit transfers." For eligible credits resulting from property held by a partnership or S Corporation, any election to transfer a credit must be made at the partnership or S corporation level.

Pre-filing registration requirement

The proposed rules describe the requirements for electronic pre-filing registration for eligible taxpayers that want to transfer credits. The IRS also released temporary regulations (TD 9975) that list the requirements and state that the IRS anticipates opening the electronic portal for pre-filing registration in Fall 2023.

Under the pre-filing requirements, taxpayers that want to transfer credits must obtain a registration number for each eligible facility, then give the registration number to the transferee taxpayer, who must use it to complete a transfer election statement. The transferor must also give the IRS the supporting documentation relating to the construction or acquisition of the eligible credit property (e.g., permits, leases) and provide documentation to validate the existence of the eligible credit property, any bonus credits and the evidence of credit qualification. The transfer election statement, also described in the proposed rules, must be attached to the tax returns of both parties.

The proposed rules clarify that taxpayers can transfer the eligible credit to multiple parties. If the credit is being transferred to multiple parties, the same registration number will be provided to all parties, but separate registration numbers are required for each facility where there are multiple facilities.


The pre-filing registration requirements are more substantive than many people anticipated in that supporting documentation needs to be transferred to both the IRS and the transferee. It remains to be seen whether the IRS will use the additional support to apply enhanced audits for transferred tax credits.

Additionally, the need to undertake a pre-filing registration on a facility-by-facility basis begs for additional guidance. While Revenue Ruling 94-31 defines an onshore wind facility as a pad, pole and turbine, there is no similar guidance for solar and other technologies, which rely on general tax principles instead. It is also interesting that the IRS did not grant the ability to look at a project as a single facility as it did with other issues like "begun construction." It is unclear if this is intentional or an oversight.

Transfer elections

The proposed rules describe the requirements for making a transfer election, including whether the transfer election is allowed, how and when the election must be made, limitations on the transfer election, determining the eligible credit, the transfer election statement that must be attached to the tax returns and how to treat the payments for all or a portion of the credits.

Under the proposed rules, taxpayers could transfer part of the tax credit from an eligible facility. In addition, the tax credit (all or part) from an eligible facility could be transferred to multiple taxpayers provided that the total tax credits transferred do not exceed the total credits for which the project is eligible.

No transfer would be allowed if the taxpayer did not own the eligible property and the tax credit would be claimed from an election by another taxpayer. This situation crops up in IRC Section 45Q projects and more prevalently for solar credits (IRC Section 48) where a common tax equity structure is the lease passthrough under IRC 50(d)(5) whereby the owner of the asset elects to pass the tax credit to a qualified lessee. In that case, the lessee could not transfer the tax credits.

The proposed rules clarify that taxpayers may transfer a portion of an eligible credit, but the portion must be a "vertical slice" of the tax credits and cannot relate solely to a bonus credit, such as the domestic content bonus. Thus, a taxpayer cannot single out the bonus credit for purposes of the transfer.

In addition, transferees can reduce their estimated tax credits before buying the credits.


Many tax-equity transactions were closed before guidance on the bonus credit was released, which resulted in an agreement whereby the tax equity investor would get the base tax credits and the bonus credits would be transferred. The proposed rules would prohibit this while allowing a portion of the tax credits to be transferred, creating the same economic result but likely with a different sharing of tax risk around the qualification for the bonus credits.

The inability of a taxpayer that receives an investment tax credit through a passthrough election to then transfer the tax credit is a bit surprising and likely eliminates many of the tax-planning strategies discussed before the guidance.

Recapture rules

If an eligible project becomes ineligible after the credits are transferred, the proposed rules confirm that the transferee is liable for any recaptured tax credits. The credits' seller must tell the buyer, in a "timely" manner, if the project is no longer eligible.

Departing from the general rule that transferring the tax credit property would create recapture, the proposed rules set forth that the "recapture tax liability resulting from the reduction of an S corporation shareholder's interest or a partner's interest in general profits should continue to result in recapture to the applicable disposing shareholder or partner." Thus, there is no recapture liability on the transferee.

The proposed rules also clarified that IRC Section 6418 does not prohibit an eligible taxpayer and a transferee from contracting between themselves to indemnify the transferee against a recapture event.


While many taxpayers had hoped that recapture would be the transferor's responsibility as opposed to the transferee, the guidance offers some leniency for partnerships and S corporations but largely leaves transferees with a risk that is out of their control. The explicit allowance for guarantees is helpful, and all tax credit transfers could be expected to have a guarantee covering any losses due to recapture. It is likely that non-creditworthy counterparties will need insurance to transact competitively.

Partnerships and S corporations

The proposed rules clarify that a partnership or S corporation may qualify as an eligible buyer or seller of the credits and property can be owned by a disregarded entity. Income from the transfer would be treated as arising from an investment activity, not from the conduct of a trade or business.

In addition, the proposed rules address the rule that an eligible credit may only be transferred once in the partnership context by requiring partnerships to treat a transferred specified credit portion purchased by a transferee partnership as an "extraordinary item" under Treas. Reg. Section 1.706-4(e). By making the transferred credit an extraordinary item, a credit transferred to a partnership would be allocated to partners based on the sharing ratios in place on the date of the transfer. If the transferee partnership and transferor have the same tax years, this extraordinary item is deemed to occur on the date the transferee partnership first makes a cash payment to an eligible taxpayer for any transferred specified credit portion. According to the Preamble, this was done to prevent taxpayers from circumventing the "one transfer rule" by having partners come in and out of a partnership. The proposed rules also provide detailed instructions on how to deal with parties that have different tax years.

The proposed rules create the new concept of a "partner's eligible credit amount." This concept allows partners to take different approaches to how they want to utilize the tax credits. Under the proposed rules, the partnership would first have to determine each partner's distributive share of the otherwise eligible credits. The transferor partnership could then determine, in any manner described in the partnership agreement, or as the partners may agree, the portion of each partner's eligible credit amount to be transferred, retained and allocated. The partnership could then allocate to each partner its agreed-upon share of eligible credits, tax-exempt income resulting from credit portions, or both.


The concept of "partner's eligible credit amount" should be welcomed by taxpayers as it gives partnerships significant flexibility and allows partners to choose what they want to do based on their particular tax profile. In a simple example, a partnership may have one partner that wants to keep its share of the tax credit while the other wants to sell its share. Without this rule, the unsold credits might have been allocated 50/50 in accordance with the partnership agreement. Further, this will allow developers/sponsors to monetize their 1% of the tax credits, which they get allocated in typical tax-equity transactions.

Partnerships and S corporation subject to IRC Section 49 at-risk rules

The proposed rules address the situation where the IRC Section 49 at-risk rule might affect the amount of the eligible credits (which concerns the project's financing requirements). If this rule applies, the amount of an eligible investment credit held directly by a transferor partnership or transferor S corporation must be determined by taking into account the IRC section 49 at-risk rules at the partner or shareholder level.

Under the credit at-risk rules in IRC Section 49 (which differ from the general at-risk rules in IRC Section 465), if a credit-generating project is encumbered with too much debt and the owners are not personally liable, the partnership or S corporation's base for calculating the credit is reduced to the amount of capital that is at risk. If the amount of capital at risk increases in later years, some or all of any suspended credit can get "released." If the capital at risk decreases, there is a recapture of previously allowed credits.


The regulations make it clear that the IRC Section 49 at-risk regime applies to these transferable credits. Thus, if a project that could have generated $100 of credits is limited by IRC Section 49 to only $70 credits, the most the S corporation or partnership can transfer to another party is only $70. Overall, it is a relatively logical conclusion.

Buyers of credits subject to IRC Section 469

The proposed regulations would essentially permit only individuals, estates and trusts (including exempt organizations that have unrelated business taxable income (UBTI) and are organized as trusts), closely-held C corporations and personal service corporations to use a purchased credit to offset tax exclusively from passive business income generated by businesses they own directly, or indirectly, through partnerships and S corporations. It then follows that these taxpayers cannot use the credits to offset wages, active business income from their businesses (i.e., self-employment income), or investment income and retirement income. Large corporations, in contrast, do not have a similar limitation.


The proposed regulations would permit the transferee to use the credit only against tax imposed on net passive income (within the meaning of IRC Section 469). This treatment of transferees is one of the more unusual, and unexpected, portions of the proposed regulations in that it would exclude a large portion of the tax-paying public from this transferable credit regime.


The proposed rules also address real estate investment trusts (REITs). The proposed rules do not definitively say that eligible credits that have not yet been transferred are treated as a real estate asset, cash or cash items, and therefore would not cause a REIT to fail the asset test under IRC Section 856(c)(4). In the Preamble, however, the IRS noted that "the Treasury Department and the IRS believe that the proposed regulations, particularly with respect to the paid in cash and timing of sale requirements, will assist REITs in managing issues with the REIT asset test." It also asked for comments on whether this was enough guidance.

The Preamble to the proposed rules also stated that the Treasury Department and IRS do not believe that the transfer of eligible tax credits results in a prohibited transaction. This statement responds to a comment about whether transferring an eligible credit under IRC Section 6418 would be considered a dealer sale under the REIT prohibited transactions rules of IRC Section 857(b)(6). "Since cash received by an eligible REIT as consideration for the transfer of an eligible tax credit would not be includible in any calculation of the eligible taxpayer's gross income, the transaction cannot result in any net income and, consequently, there is no prohibited transaction tax issue regarding the transfer of an eligible credit," according to the Preamble.


REITs went one for two on the issues for which they were awaiting guidance. The fact that the transfer does not result in a prohibited transaction is very helpful. The failure to explicitly say that credits that have yet to be transferred are good assets was disappointing, but the fact that the IRS said that the proposed regulations will assist in managing the issue is at least a head nod. REITs may wish to request more specific guidance.

Excessive transfers

Under the proposed rules, the 20% penalty for an excessive transfer credit would not apply if the taxpayer receiving the credit shows that the transfer resulted from reasonable cause, which would be based on the relevant facts and circumstances of the transaction. In the Preamble, the IRS lists the factors that it would list in the proposed regulations that a taxpayer could demonstrate to show reasonable cause:

  • The extent of the transferee's efforts to determine that the amount of the credit portion transferred to the transferee is not more than the allowed amount and was not transferred to any other taxpayer (this is the most important factor)
  • Review of the eligible taxpayer's records (including documentation evidencing eligibility for bonus credit amounts)
  • Reasonable reliance on third-party expert reports
  • Reasonable reliance on the transferor taxpayer's representations
  • Review of audited financial statements provided to the Securities and Exchange Commission (and underlying information), if applicable


When IRC Section 6418 was first enacted, many people wondered how excessive transfers would be defined and how it would be handled in situations where the IRS may, upon audit, determine that the eligible tax credit is lower than the transferred tax credit. The list of factors helps transaction participants understand where the risk lies.


The proposed rules do not address whether the normalization rules under former IRC Section 46(f), which affect depreciation, would continue to apply to the transferor because the transferee is deemed the taxpayer for purpose of the credit.


To gain much needed clarity, companies should submit comments by the due date or possibly engage with the IRS by requesting a private letter ruling.


Contact Information
For additional information concerning this Alert, please contact:
National Tax
   • Greg Matlock, Americas Energy Transition and Renewable Energy Leader (
   • Dorian Hunt (
Americas Power & Utilities Tax Group
   • Brian Murphy, Americas Power & Utilities Tax Leader (
   • Mike Reno (
Tax Credit Investment Advisory Services
   • Michael Bernier (
Credits and incentives and sustainability
   • Paul Naumoff (
   • Akshay Honnatti (
   • David Camerucci (
Exempt Organization Tax Services
   • Stephen Clarke (
   • Melanie McPeak (
   • Kara Adams (
Private Client Services
   • David Kirk (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor