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IRS Issues Final Regulations on Transfers of Energy Credits Under the Inflation Reduction Act
(Parker Tax Publishing May 2024)
The IRS issued final regulations concerning the election Code Sec. 6418, enacted by the Inflation Reduction Act of 2022, to transfer certain tax credits. The regulations describe rules for the election to transfer eligible credits in a taxable year, including definitions and special rules applicable to partnerships and S corporations and regarding excessive credit transfer or recapture events; in addition, the regulations describe rules related to a required IRS pre-filing registration process. T.D. 9993.
Background
The Inflation Reduction Act of 2022 (IRA) enacted Code Sec. 6418 to provide an election to transfer certain tax credits. Code Sec. 6418(a) provides that, in the case of an eligible taxpayer that elects to transfer to an unrelated transferee taxpayer all (or any portion specified in the election) of an eligible credit determined with respect to the eligible taxpayer for any tax year, the transferee taxpayer specified in such election (and not the eligible taxpayer) is treated as the taxpayer for purposes of the Code with respect to such credit (or such portion thereof). Under Code Sec. 6418(b), any amount of consideration paid by the transferee taxpayer to the eligible taxpayer for the transfer of such credit (or such portion thereof) is (1) required to be paid in cash, (2) not included in the eligible taxpayer's gross income, and (3) not allowed as a deduction to the transferee taxpayer.
Code Sec. 6418(f)(2) defines the term "eligible taxpayer" to mean any taxpayer that is not described in Code Sec. 6417(d)(1)(A) (that is, any taxpayer that is not an "applicable entity" by reason of Code Sec. 6417(d)(1)(A)).
Code Sec. 6418(f)(1)(A) defines the term "eligible credit" to mean each of the following 11 credits:
(1) So much of the credit for alternative fuel vehicle refueling property allowed under Code Sec. 30C that, pursuant to Code Sec. 30C(d)(1), is treated as a credit listed in Code Sec. 38(b);
(2) The renewable electricity production credit determined under Code Sec. 45(a);
(3) The credit for carbon oxide sequestration determined under Code Sec. 45Q(a);
(4) The zero-emission nuclear power production credit determined under Code Sec. 45U(a);
(5) The clean hydrogen production credit determined under Code Sec. 45V(a);
(6) The advanced manufacturing production credit determined under Code Sec. 45X(a);
(7) The clean electricity production credit determined under Code Sec. 45Y(a);
(8) The clean fuel production credit determined under Code Sec. 45Z(a);
(9) The energy credit determined under Code Sec. 48;
(10) The qualifying advanced energy project credit determined under Code Sec. 48C; and
(11) The clean electricity investment credit determined under Code Sec. 48E.
Under Code Sec. 6418(e)(1), an eligible taxpayer must make an election to transfer any portion of an eligible credit on its original tax return for the tax year for which the credit is determined by the due date of such return (including extensions of time). However, a transfer election cannot be made earlier than February 13, 2023 (i.e., 180 days after the August 16, 2022, enactment date of the IRA).
On June 31, 2023, the IRS published proposed regulations under Code Sec. 6418 (REG-101610-23) to provide guidance on transfer elections. The proposed regulations included Prop. Reg. 1.6418-4, which contained proposed rules identical to the text of temporary regulations (T.D. 9975) at Reg. Sec. 1.6418-4T. Those temporary regulations also were published on June 21, 2023, to provide guidance on the mandatory information and registration requirements for transfer elections. On March 11, 2024, the IRS published final regulations under Code Sec. 6417 (T.D. 9988) to provide guidance on the Code Sec. 6417 elective payment election. Among other things, the Code Sec. 6417 final regulations provide guidance on the definition of applicable entity under Code Sec. 6417(d)(1)(A).
Final Regulations
On April 30, the IRS published final regulations (T.D. 9993) concerning the transfer election under Code Sec. 6418. The regulations describe rules for the election to transfer eligible credits in a tax year, including definitions and special rules applicable to partnerships and S corporations and regarding excessive credit transfer or recapture events. In addition, the regulations describe rules related to a required IRS pre-filing registration process. The final regulations adopt the June 2023 proposed regulations with modifications in response to practitioners' comments. Below are some of the modifications made by the final regulations.
Eligible Taxpayer
Code Sec. 6418(f)(2) defines the term "eligible taxpayer" to mean any taxpayer that is not described in Code Sec. 6417(d)(1)(A). Under Prop. Reg. Sec. 1.6418-1(b), the term "eligible taxpayer" means any taxpayer (as defined in Code Sec. 7701(a)(14)), other than one described in Code Sec. 6417(d)(1)(A) and Reg. Sec. 1.6417-1(c) (the proposed regulations erroneously cited to Reg. Sec. 1.6417-1(b)). As the preamble to the proposed regulations noted, the term "taxpayer" in Code Sec. 7701(a)(14) means "any person subject to any internal revenue tax" and generally includes entities that have a United States employment tax or excise tax obligation even if they do not have a United States income tax obligation.
A practitioner requested a clarification that a partnership wholly or partially owned by applicable entities described in Code Sec. 6417(d)(1)(A) qualifies as an eligible taxpayer under Code Sec. 6418(f)(2). The IRS agreed that if such a partnership has not elected to be treated as an applicable entity with respect to the credit for carbon oxide sequestration under Code Sec. 45Q, the clean hydrogen production credit under Code Sec. 45V, or the advanced manufacturing production credit under Code Sec. 45X, it can otherwise qualify as an eligible taxpayer. The IRS explained that Code. Sec. 6418(f)(2) defines eligible taxpayer as a taxpayer other than one described in Code Sec. 6417(d)(1)(A). Under Code Sec. 6417 and the Code Sec. 6417 final regulations, a partnership (regardless of the tax status of its partners) can only be treated as an applicable entity with respect to the Code Sec. 45Q credit, Code Sec. 45V credit, or Code Sec. 45X credit, and only if the partnership makes an elective payment election. Thus, if a partnership has not elected to be treated as an applicable entity with respect to any of those credits, it can qualify as an eligible taxpayer.
Manner of Making a Valid Transfer Election
Prop. Reg. Sec. 1.6418-2(b)(3) provided rules for making a valid transfer election and included that a transfer election is made based on each specified credit portion with respect to a single eligible credit property. To make a valid transfer election, an eligible taxpayer as part of filing an annual tax return, must include the following: (1) a properly completed relevant source credit form for the eligible credit for the tax year that the eligible credit was determined; (2) a properly completed Form 3800, General Business Credit; (3) a schedule attached to the Form 3800 showing the amount of eligible credit transferred for each eligible credit property; (4) a transfer election statement as described in Prop. Reg. Sec. 1.6418-2(b)(5); and (5) any other information specified in guidance. The final regulations adopt this proposed rule without substantive change.
Some practitioners asked that a transfer election be permitted on an amended return or administrative adjustment request (AAR) and/or that a taxpayer be permitted an extension of time under the Code Sec. 9100 relief procedures to make an election. The IRS responded that under Code Sec. 6418(e), a transfer election must not be made "later than the due date (including extensions of time) for the return of tax for the taxable year for which the credit is determined." The preamble to the proposed regulations provided that eligible taxpayers could make a transfer election on a "superseding return" up until the extended due date for the return. The final regulations modify Prop. Reg. Sec. 1.6418-2(b)(4) 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 AAR.
The final regulations further clarify that 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. This clarification addresses situations in which an eligible taxpayer intended to make a transfer election but made a reporting error with respect to an element of a valid election (for example, miscalculating the amount of the eligible credit on the original return or making a typographical error in the process of inputting a registration number), and to allow the eligible taxpayer to correct any errors that would result in a denial of the transfer election. The provision cannot be used to revoke a transfer election made on an original return or to make a transfer election for the first time on an amended return.
Observation: The IRS noted that the rules regarding the original return requirement apply to transfer elections made on an originally filed return of the eligible taxpayer. A transferee taxpayer, however, may take a transferred specified credit portion into account on a properly filed amended return or AAR, or correct the amount of the transferred specified credit portion on a properly filed amended return or AAR to, for example, avoid a determination by the IRS that the transferee taxpayer is subject to an excessive credit transfer under Reg. Sec. 1.6418-5(a).
The final regulations also permit an extension of time under Reg. Sec. 301.9100-2(b) to allow for an automatic six-month extension from the due date of the return (including extensions) to make the election prescribed in Code Sec. 6418(e)(1). The IRS noted that, since the due date of the transfer election is prescribed by statute, the Code Sec. 9100 relief procedures apply only insofar as the late election is being filed pursuant to Reg. Sec. 301.9100-2(b), which requires that the taxpayer timely filed its return for the year the election should have been made.
Excessive Credit Transfers
Under Code Sec. 6418(g)(2)(A), if the IRS determines that there is an excessive credit transfer to a transferee taxpayer, then the income tax imposed on the transferee taxpayer is generally increased in the year of such determination by the amount of the excessive credit transfer plus 20 percent of such excessive credit transfer. An excessive credit transfer is defined in Code Sec. 6418(g)(2)(C) as, with respect to a facility or property for which an election is made under Code Sec. 6418(a) for any tax year, an amount equal to the excess of (1) the amount of the eligible credit claimed by the transferee taxpayer with respect to such facility or property for such tax year; over (2) the amount of the eligible credit that, without application of Code Sec. 6418, would be otherwise allowable with respect to such facility or property for such tax year.
Prop. Reg. Sec. 1.6418-5(a)(3) provided that any payments made by a transferee taxpayer to an eligible taxpayer that directly relate to an excessive credit transfer are not subject to Code Sec. 6418(b)(2). Under Code Sec. 6418(b)(2), any amount paid by a transferee taxpayer to an eligible taxpayer as consideration for a credit transfer is not includible in the eligible taxpayer's gross income. The final regulations revise Prop. Reg. Sec. 1.6418-5(a)(3) to provide that any payment made by a transferee taxpayer to an eligible taxpayer that directly relates to the excessive credit transfer is not subject to Code Sec. 6418(b)(2) or Code Sec. 6418(b)(3). The IRS added the reference to Code Sec. 6418(b)(3) to 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. In addition, the final regulations revise Prop. Reg. Sec. 1.6418-5(a)(3) to clarify that the amount of a payment that directly relates to an excessive credit transfer is equal to the total consideration paid in cash by the transferee taxpayer for its specified credit portion multiplied by the ratio of (1) the amount of the excessive credit transferred to the transferee taxpayer to (2) the amount of the transferred specified credit portion claimed by the transferee taxpayer.
The final regulations are effective on July 1, 2024.
For a discussion of credit transfer elections, 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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