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May 8, 2024

IRS final regulations on transferring energy credits under IRC Section 6418 adopt proposed regulations with few modifications

  • Although the IRS provided thoughtful consideration to taxpayer comments and suggestions, the final regulations broadly adopted the proposed regulations with little modification.
  • Several commenters requested the ability to sell components of a credit separately. The final regulations confirm that taxpayers may only transfer a "vertical" slice of an eligible tax credit.
  • The final regulations do not specifically address normalization for utilities as requested by some commenters; however, the IRS clarified that an eligible taxpayer is not subject to the normalization rules for any cash consideration paid by a transferee.
  • The final regulations do not provide broad grouping relief for taxpayers, but rather retain the option introduced in the proposed regulations, which allowed taxpayers choosing the investment tax credit to elect to define an energy project consistent with IRC Section 48(a)(9)(a)(ii) as long as they consistently apply that definition for all purposes of the Code.

In final regulations (TD 9993), Treasury and the IRS adopt, with few modifications, proposed regulations on transferring renewable energy credits. The final regulations are effective July 1, 2024.

The Inflation Reduction Act (IRA) 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 went into effect January 1, 2023, and proposed regulations (REG-101610-23) and identical temporary regulations were released in June 2023 (see Tax Alert 2023-1103).

The IRS received more than 80 comments on the proposed regulations and 10 presenters provided testimony at a hearing.

In March 2024, the IRS released final regulations on the direct-pay elections under IRC Section 6417 for certain energy tax credits (TD 9988) and under IRC Section 48D for the advanced manufacturing investment credits (TD 9989) (see Tax Alert 2024-0624).


The IRA allows certain credits to be transferred. Under 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 (IRC Section 45Y) and investment tax credit (ITC) (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 final regulations adopt the proposed regulations' electronic pre-filing registration process through the IRS's registration portal. The IRS said in the Preamble that it will consider ways outside of the final regulations to make the pre-filing registration process "more streamlined" and will continue to monitor the process to determine whether there are areas where more efficiencies can be created.

The IRS said it is not adopting a transition rule for the 2023 tax year. For guidance with the pre-filing process, the IRS referred taxpayers to Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 (CHIPS) Pre-Filing Registration Tool User Guide and Instructions.

Some commenters asked for registration numbers to be given up to 60 days before construction has begun. The IRS said in the Preamble that it has "determined that a registration number should not be given before the eligible credit property is placed in service, which is an important step to ensuring that the eligible credit property qualifies for the eligible credit for which the eligible taxpayer seeks to make a transfer election."

The IRS kept the yearly registration requirements, saying in the Preamble that it is necessary to meet administrative needs.

Transfer elections

The final regulations adopt the proposed regulations' requirements for making a transfer election. The final rules confirm that taxpayers may transfer part of the tax credit from an eligible facility. In addition, the tax credit (all or part) from an eligible facility may be transferred to multiple taxpayers provided that the total tax credits transferred do not exceed the total credits for which the project is eligible.

The final regulations confirm 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.

For an IRC Section 45Q credit, the final regulations clarified that a component of carbon capture equipment within a single process train described in Treas. Reg. Section 1.45Q-2(c)(3) falls under the definition of eligible credit property.

The final regulations modify the proposed regulations by clarifying that a transfer election filed by an electing taxpayer may be made or revised on a superseding return, but not on an amended return or administrative adjustment request (AAR). In addition, a transfer election cannot be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an AAR, although a numerical error with respect to a properly claimed transfer election may be corrected on an amended return or by filing an AAR if necessary.

Recapture rules

If an eligible project becomes ineligible after the credits are transferred, the final regulations confirm that the transferee is liable for any recaptured tax credits. The credits' seller must tell the buyer "in sufficient time to allow the eligible taxpayer to calculate any basis adjustment with respect to the investment credit property by the due date of the eligible taxpayer's return (without extensions) for the [tax] year in which the recapture event occurs," according to the final regulations.

Grouping for registration and transfers

Some commenters requested that the regulations allow grouping for registration and credit transfers. The IRS noted that the definition of eligible credit property in IRC Section 6418 is based on the relevant rules for the underlying eligible credit, and changes to the definition of particular properties are outside of this rulemaking. If the underlying Code sections allow grouping to determine a qualified property, the Preamble permits grouping for purposes of a registration number. Likewise, if such definitions do not allow for grouping, then each eligible credit property must be registered separately; for some eligible credits, however, the pre-filing registration portal allows eligible credit property information to be bulk uploaded.

Although the final regulations do not broadly provide grouping relief for most of the eligible credits, taxpayers that intend to transfer IRC Section 48 ITCs should particularly note Treas. Reg. Section 1.6418-1(d)(9)(ii). That section defines the eligible credit property for IRC Section 48 purposes; it states, in part, that for prefiling registration and elections, at the option of the eligible taxpayer, an energy property is one described in IRC Section 48(a)(9)(A)(ii). That section defines the term "energy project" to mean a project consisting of one or more energy properties that are part of a single project, which appears to provide optionality for filing at either the unit (e.g., block) or the project level for IRC Section 48 pre-filing registration and election purposes.

Partnerships and S corporations

The final regulations confirm 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 is treated as arising from an investment activity, not from the conduct of a trade or business.

In addition, the final regulations confirm 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.

The final regulations clarify that "an upper-tier partnership's distributive share of a transferred specified credit portion is treated as an extraordinary item to the upper-tier partnership. As a result, a transferred specified credit portion must be allocated among the partners of an upper-tier partnership as of the time the transfer of the specified credit portion is treated as occurring to the transferee partnership in accordance with [Treas. Reg. Section] 1.6418-3(b)(4)(iv) and [Treas. Reg. Section] 1.706-4(e)(1) and (e)(2)(ix). This is the case regardless of whether the transferee partnership and the upper-tier partnership have different [tax] years under [IRC S]ection 706(b)."

The proposed regulations created, and the final regulations adopt, 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. The partnership must first determine each partner's distributive share of the otherwise eligible credits. The transferor partnership can 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 can then allocate to each partner its agreed-upon share of eligible credits, tax-exempt income resulting from credit portions, or both. The Preamble to the final regulations said the "Treasury Department and the IRS appreciate that the partnership allocation rules under IRC [S]ection 6418 could be considered complex and difficult to administer, but any such complexity of those rules is warranted given the flexibility they provide to taxpayers operating through transferor partnerships."

The final regulations clarify that a partnership or an S corporation correcting an error on an amended return or AAR must have made an error in the information included on the original return so there is a substantive item to correct. A partnership or an S corporation cannot correct a blank item or an item that is described as being "available upon request."

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

The final regulations adopt the proposed regulations' treatment of a 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 decreases 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.

Buyers of credits subject to IRC Section 469

The final regulations, like the proposed regulations, 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. The FAQs note that most taxpayers do not have tax liability for passive income. Commenters had asked to include more taxpayers.

The IRS said in the Preamble to the final regulations that there is no carveout for IRC Section 469 in IRC Section 6418. "All of the eligible credits listed in [IRC Section] 6418(d) arise in the conduct of a trade or business and are general business credits under [IRC Section] 38. As a result, [IRC Section] 469 applies to the use of such eligible credits unless Congress provides otherwise."


The final regulations established in Treas. Reg. Section 1.6418-5(i)(1) that eligible credits that have not yet been transferred under IRC Section 6418 are disregarded for purposes of the REIT Asset Test.

This provision addresses comments after the proposed regulations had left this question open. The IRS said in the Preamble that it recognizes "that REITs may be continuously earning and selling eligible credits and, therefore, need certainty with respect to this REIT qualification issue."

Excessive transfers

The 20% penalty for an excessive transfer credit does not apply if the taxpayer receiving the credit shows that the transfer resulted from reasonable cause, which is based on the relevant facts and circumstances of the transaction. The final regulations note that the IRS will make excessive credit transfer determinations under "established examination procedures," and an eligible taxpayer or transferee taxpayer may challenge an adverse determination if the determination creates a tax deficiency under the deficiency procedures, including the right to petition the Tax Court.

In response to comments asking for clarification on the effect on transferees, the final regulations revise Treas. Reg. Section 1.6418- 5(a)(3) so that neither IRC Section 6418(b)(2), IRC Section 6418(b)(3) nor Prop. Treas. Reg. Section 1.6418-2(e) apply to any payment that (1) is made by a transferee taxpayer to an eligible taxpayer, and (2) directly relates to the excessive credit transfer (as defined in Prop. Treas. Reg. Section 1.6418-5(b)). "Adding the reference to [IRC Section] 6418(b)(3) should clarify that a transferee taxpayer is not precluded from deducting the portion of the consideration paid to the eligible taxpayer for a specified credit portion that relates to an excessive credit transfer," according to the Preamble.


The proposed regulations did 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. The final regulations also declined to adopt a specific rule addressing the normalization rules, saying it was beyond the scope of the final regulations. The IRS clarified, however, that "an eligible taxpayer is not subject to the normalization rules with respect to any cash consideration paid by a transferee taxpayer for a specified credit portion that is described in [IRC S]ection 6418(b)(2). Any portion of an eligible credit that is not transferred, however, would remain subject to the normalization rules as applicable." Taxpayers may nonetheless want to ask for a private letter ruling on the normalization considerations of a transferred credit to gain certainty around the result before factoring it into customer rates.


Although the IRS appears to have given thoughtful consideration to taxpayer comments, very few material changes were incorporated between the proposed and final regulations. Some commenters requested that the regulations allow grouping of eligible credit properties for purposes of registration and making a transfer election. Although the regulations, on the whole, do not provide broad grouping relief for taxpayers, they do retain language similar to the proposed regulations, stating that the taxpayer may elect to define an energy project consistent with IRC Section 48(a)(9)(a)(ii) as long as it consistently applies that definition for all purposes of the Code. While this provision is limited to IRC Section 48, it appears to alleviate some of the administrative burden of registering each energy property (e.g., unit or block level) and instead allows a taxpayer to opt for pre-registration and elections at the project level. Taxpayers that are considering availing themselves of this grouping provision should carefully consider any unintended consequences of adopting the definition, such as the potential for disqualifying what may have otherwise been qualified interconnection costs associated with the asset.

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Contact Information

For additional information concerning this Alert, please contact:

National Tax

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