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IRS Issues Guidance on Elective Payments and Transfers of Energy Credits
(Parker Tax Publishing June 2023)
The IRS issued proposed and temporary regulations with rules for electing to treat clean energy credits and the advanced manufacturing investment credit as a refundable payment of federal income tax and for transferring certain credits to unrelated parties. The guidance also addresses a mandatory IRS pre-filing registration process that must be completed prior to making an elective payment or transfer. REG-101607-23; REG-101610-23; REG-105595-23; T.D. 9975.
Background
Congress enacted the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) to establish and expand various tax credits to incentivize clean energy and energy efficiency. The IRA also enacted Code Sec. 6417 to allow certain taxpayers that would otherwise be unable to use these credits because they do not owe federal income tax to elect to treat the amount of the credit as a payment of tax and refunding any resulting overpayment. In addition, the IRA enacted Code Sec. 6418 to allow taxpayers that are ineligible to make the election under Code Sec. 6417 to elect to transfer (i.e., sell for cash) all or a portion of certain clean energy credits.
Under Code Sec. 6417, "applicable entities" (generally, tax-exempt organizations, state, local and tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, and rural electric cooperatives) can make an election to treat an "applicable credit" as making a payment against the entity's federal income tax liability rather than as a nonrefundable credit (elective payment election.) Under Code Sec. 6417(b), the tax credits that are eligible for the elective payment election are:
(1) the energy credit under Code Sec. 48;
(2) the clean electricity investment credit under Code Sec. 48E;
(3) the renewable electricity production credit under Code Sec. 45;
(4) the clean electricity production credit under Code Sec. 45Y;
(5) the commercial clean vehicle credit under Code Sec. 45W;
(6) the zero-emission nuclear power production credit under Code Sec. 45U;
(7) the advanced manufacturing production credit under Code Sec. 45X;
(8) the clean hydrogen production credit under Code Sec. 45V;
(9) the clean fuel production credit under Code Sec. 45Z;
(10) the carbon oxide sequestration credit under Code Sec. 45Q;
(11) the credit for alternative fuel vehicle refueling/recharging property under Code Sec. 30C; and
(12) the qualifying advanced energy project credit under Code Sec. 48C.
In the case of three of the above credits - the carbon oxide sequestration credit, the credit for production of clean hydrogen, and the advanced manufacturing production credit - Code Sec. 6417(d)(1) allows taxpayers that are not "applicable entities" to elect to be treated as an applicable entity for purposes of the elective payment election.
Special rules for partnerships and S corporations that hold directly a facility or property for which an applicable credit is determined are provided in Code Sec. 6417(c). Under Code Sec. 6417(c)(1), an elective payment election must be made by the partnership or S corporation in the manner provided by the IRS. If such a partnership or S corporation makes an elective payment election with respect to any applicable credit, (1) a payment is made to such partnership or S corporation equal to the applicable credit amount; (2) Code Sec. 6417(e) is applied with respect to the applicable credit before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such applicable credit; (3) any applicable credit amount with respect to which the election in Code Sec. 6417(a) is made is treated as tax-exempt income for purposes of Code Secs. 705 and 1366; and (4) a partner's distributive share of such tax-exempt income is based on such partner's distributive share of the otherwise applicable credit for each tax year (an S corporation shareholder's share of tax exempt income is based on the shareholder's pro rata share). Code Sec. 6417(c)(2) provides that, in the case of any facility or property held directly by a partnership or S corporation, no election by any partner or shareholder is allowed under Code Sec. 6417(a) with respect to any applicable credit determined with respect to such facility or property.
Under Code Sec. 6418, a taxpayer that is not an "applicable entity" (as defined above) may elect to transfer (i.e., sell) all or a portion of all of the credits listed above except the commercial clean vehicle credit under Code Sec. 45W to unrelated taxpayers. Code Sec. 6418 also provides special rules relating to partnerships and S corporations and directs the Treasury Secretary to provide rules for making elections under Code Sec. 6418 and to require information or registration necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under Code Sec. 6418.
In Notice 2022-50, the IRS requested feedback from the public on issues that may require guidance with respect to the elective payment and transfer election provisions under Code Secs. 6417 and 6418.
The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 (Pub. L. 117-167) established the advanced manufacturing investment credit under Code Sec. 48D. Code Sec. 48D(d) allows taxpayers (other than partnerships and S corporations) to elect to treat the amount of the advanced manufacturing investment credit determined under Code Sec. 48D(a) as a payment against their federal income tax liabilities. Code Sec. 48D(d) also provides special rules relating to elective payments to partnerships and S corporations. Code Sec. 48D applies to qualified property placed in service after December 31, 2022, and, for any property the construction of which began prior to January 1, 2023, only to the extent of the basis thereof attributable to the construction, reconstruction, or erection of such qualified property after August 9, 2022 (the date of enactment of the CHIPS Act).
In March 2023, the IRS issued proposed regulations in REG-120653-22 to implement the general provisions regarding the Code Sec. 48D credit. The March 2023 proposed regulations included proposed definitions of various statutory terms. The March 2023 proposed regulations also proposed rules requiring pre-filing registration with the IRS in advance of filing an elective payment election; and proposed rules implementing the credit recapture rules under Code Sec. 50(a)(3).
Proposed and Temporary Regulations
On June 14, the IRS issued the following guidance relating to elective payment and transferability elections for credits under the IRA and the CHIPS Act:
(1) Proposed regulations in REG-101607-23 regarding the elective payment election provisions under Code Sec. 6417;
(2) Proposed regulations in REG-101610-23 concerning the transfer election provisions under Code Sec. 6418;
(3) Proposed regulations in REG-105595-23 concerning the elective payment election for the advanced manufacturing investment credit under Code Sec. 48D; and
(4) Temporary regulations in T.D. 9975 setting forth mandatory information and registration requirements for taxpayers planning to make an elective payment or transfer election.
Proposed Regulations on Elective Payment Elections
Definitions pertaining to elective payment elections are provided in Prop. Reg. Sec. 1.6417-1. Prop. Reg. Sec. 1.6417-2(a)(1) sets forth the rules for applicable entities making elective payment elections. Prop. Reg. Sec. 1.6417-2(a)(2) provides the rules for electing taxpayers making an elective payment election.
Under Prop. Reg. Sec. 1.6417-2(b)(1), an applicable entity or electing taxpayer makes an elective payment election on the applicable entity's or electing taxpayer's annual tax return. Prop. Reg. Sec. 1.6417-2(b)(2) specifies that pre-filing registration (as required under Prop. Reg. Sec. 1.6417-5) is a condition of any amount being treated as a payment that is made by an applicable entity under Code Sec. 6417(a). An elective payment election will not be effective with respect to applicable credits determined with respect to an applicable credit property unless the applicable entity or electing taxpayer receives a valid registration number for the applicable credit property and provides the registration number for each applicable credit property on its Form 3800, General Business Credit, attached to the tax return in accordance with guidance.
The special rules in Code Sec. 6417(d)(3) that relate to electing taxpayers are set forth in Prop. Reg. Sec. 1.6417-3 for clarity. Prop. Reg. Sec. 1.6417-4 provides additional rules for electing taxpayers that are partnerships or S corporations. Pre-filing registration requirements are set forth in Prop. Reg. Sec. 1.6417-5 (see below).
Under Code Sec. 6417(d)(6) and Prop. Reg. Sec. 1.6417-6 provide that the IRS may determine that an amount treated as a payment made by an applicable entity or an electing taxpayer constitutes an excessive payment. Prop. Reg. Sec. 1.6417-6(a) provides that in the case of an excessive payment determined by the IRS, the amount of income tax imposed on the applicable entity or electing taxpayer will be increased by an amount equal to the sum of (1) the amount of such excessive payment, plus (2) an amount equal to 20 percent of such excessive payment. The additional 20-percent tax amount would not apply if the applicable entity or electing taxpayer demonstrates to the satisfaction of the IRS that the excessive payment resulted from reasonable cause. If the additional 20-percent tax is applicable, it would apply in addition to any penalties, additions to tax, or other applicable amounts.
Prop. Reg. Sec. 1.6417-6(b) provides rules generally similar to the recapture rules of Code Sec. 50. Under Prop. Reg. Sec. 1.6417-6(b)(2), any reporting of recapture is made on the taxpayer's annual tax return in the manner prescribed by the IRS in future guidance, along with supplemental forms such as Form 4255, Recapture of Investment Credit.
Proposed Regulations on Transfers of Eligible Credits
Prop. Reg. Sec. 1.6418-1(a) provides generally that an eligible taxpayer may make a transfer election under Prop. Reg. Sec. 1.6418-2 to transfer any specified portion of an eligible credit determined with respect to any eligible credit property of such eligible taxpayer for any tax year to a transferee taxpayer in accordance with Code Sec. 6418 and the regulations. Specific rules for each of the 11 credits for which the transfer election is available under Code Sec. 6418(f)(1)(A) are provided Prop. Reg. Sec. 1.6418-1(d). Code Sec. 6418(b)(1) and Prop. Reg. Sec. 1.6418-2(a)(4)(ii) and Prop. Reg. Sec. 1.6418-2(e)(1) require that any amounts paid by a transferee taxpayer in connection with the transfer of a specified credit portion be paid in cash.
The rules in Prop. Reg. Sec. 1.6418-2 would describe the general requirements for making a transfer election, including clarifying when a transfer election can be made in certain ownership situations, situations where no transfer election may be made, the manner and due date for the election, limitations related to a transfer election, the determination of an eligible credit, the treatment of payments related to a transfer of eligible credits, and the treatment of a transferred specified credit portion by a transferee taxpayer.
Prop. Reg. Sec. 1.6418-2(f) would provide rules describing the transferee taxpayer's treatment of a transferred specified credit portion. Under the proposed regulations, there is no gross income to a transferee taxpayer when claiming an eligible credit if the amount paid for the eligible credit is less than the amount of the eligible credit transferred and claimed. In addition, the proposed regulations provide that a transferred specified credit portion is treated as earned in connection with the conduct of a trade or business, and, if applicable, such transferred specified credit portion is subject to the passive activity limitation rules in Code Sec. 469. However, a transferee taxpayer (or a direct or indirect owner of a transferee taxpayer that claims a transferred specified credit portion) that is subject to Code Sec. 469 is not, as a result of a transfer election, considered to have owned an interest in the eligible taxpayer's business at the time the work was done (as
required for material participation in Reg. Sec. 1.469-5(f)(1)) and cannot change the characterization of the transferee taxpayer's participation with respect to generation of the transferred specified credit portion by using any of the grouping rules in Reg. Sec. 1.469-4(c).
Prop. Reg. Sec. 1.6418-2(f)(4) would provide rules for how a transferee taxpayer can take into account a transferred specified credit portion. The proposed rules would provide that in order for a transferee taxpayer to take into account a specified credit portion, the transferee taxpayer would be required to include certain information as part of filing a return (or short year return). The proposed regulations require (1) a properly completed Form 3800, General Business Credit, taking into account a transferred eligible credit as a current general business credit, including all registration number(s) related to the transferred eligible credit; (2) a transfer election statement attached to the return; and (3) any other information related to the transfer election specified in guidance.
Additional rules for partnerships and S corporations are provided in Prop. Reg. Sec. 1.6418-3. Rules regarding the tax on excessive credit transfers imposed under Code Sec. 6418(g)(2) are provided in Prop. Reg. Sec. 1.6418-5.
Proposed Regulations on Advanced Manufacturing Investment Credit
The proposed regulations in REG-105595-23 revised the March 2023 proposed regulations to clarify that an elective payment election may only be made on an original return of tax filed not later than the due date (including extensions of time) for the return for the tax year for which the Code Sec. 48D credit is determined and in the manner as provided in guidance, and must include any required completed source credit form(s) with respect to the qualified property, a completed Form 3800, and any additional information, including supporting calculations, required in instructions to the relevant forms.
The proposed regulations also revise the March 2023 proposed regulations by explaining the application of the Code Sec. 48D(d)(3) denial of a double benefit rule and addressing the methodology for determining the amount of an elective payment, reducing the Code Sec. 48D credit amount to zero, and treating the Code Sec. 48D credit as a credit allowed for the tax year for all other purposes of the Code with respect to taxpayers other than partnerships or S corporations. The methodology with respect to a payment made to a partnership or S corporation is provided in Prop. Reg. Sec. 1.48D-6(d)(2)(ii)(B).
In addition, the proposed regulations amend the rules in the March 2023 proposed regulations relating to excessive payment and basis reduction and recapture by adding examples of excessive payment and clarifying the basis reduction and recapture notice requirement. Prop. Reg. Sec. 1.48D-6(f)(4) provides an example of excessive payment, including the year in which the tax is imposed and the calculation of the additional 20 percent tax. Prop. Reg. Sec. 1.48D-6(g)(1) provides that rules similar to the rules of Code Sec. 50(a) and (c) apply for purposes of Code Sec. 48D. Under Prop. Reg. Sec. 1.48D-6(g)(2)(i), the adjusted basis of property generally must be reduced by the amount of the Code Sec. 48D credit determined with respect to property for which the taxpayer has made an election under Code Sec. 48D(d)(1). A similar basis reduction rule for partnerships and S corporations making a Code Sec. 48D(d)(1) election is provided in Prop. Reg. Sec. 1.48D-6(g)(2)(ii). Prop. Reg. Sec. 1.48D-6(g)(2)(iii) clarifies the application of the basis adjustment rule under Code Sec. 50(c)(5) to take into account adjustments made under Prop. Reg. Sec. 1.48D-6(e)(2)(ii) for partners and S corporation shareholders of such partnerships or S corporations. Prop. Reg. Sec. 1.48D-6(g)(3) clarifies that any reporting of recapture is made on the taxpayer's annual return in the manner prescribed by the IRS in any guidance.
Proposed and Temporary Regulations on Pre-Filing Registration Requirements
Prop. Reg. Sec. Prop. Reg Sec. 1.6417-5, and Prop. Reg. Sec. 1.6418-4 provide pre-filing registration for elective payment and transfer elections. T.D. 9975 provides temporary pre-filing registration regulations which are identical to the proposed regulations.
Generally, the pre-filing registration requirements in the temporary regulations require a taxpayer to:
(1) complete the registration process electronically through an IRS electronic portal;
(2) satisfy the registration requirements and receive a registration number prior to making an elective payment or transfer election on the taxpayer's tax return for the tax year at issue;
(3) obtain a registration number for each eligible credit property with respect to which an elective payment or transfer election will be made; and
(4) provide the specific information required to be provided as part of the pre-filing registration process in order to allow the IRS to prevent duplication, fraud, improper payments, or excessive payments.
According to the FAQs posted on the IRS's website, the registration process will need to be completed in sufficient time for the taxpayer to have a valid registration number at the time the taxpayer files its tax return. The IRS also stated that more information about this process will be available by late 2023.
For a discussion of the elective payment election, see Parker Tax ¶104,220. For a discussion of the transfer election, see Parker Tax ¶104,250.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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