Treasury issues proposed regulations on IRA elective pay and transferability of tax credits

Overview: Section 13801 of the IRA creates new sections 6417 and 6418 of the U.S. Internal Revenue Code, which provide for direct pay and transferability, respectively, for certain tax credits. 

Direct Pay: Section 6417 allows for direct pay for taxable entities, for 3 tax credits: 

• section 45Q, the credit for carbon capture and sequestration;
• section 45V, the credit for clean hydrogen production; and
• section 45X, the credit for advanced manufacturing production.

Section 6417 also provides for direct pay for tax exempt and government entities for virtually all tax incentives included/modified in the Inflation Reduction Act

Under section 6417, private companies may elect to treat applicable tax credits listed above as a “payment” against (in excess of) tax owed, and then receive a refund from the IRS for any amount of the credit exceeding the company’s tax liability. Effectively, this option makes these credits “refundable” tax credits, and the IRS would issue a refund check to the company once the IRS processes the direct payment application.  

Per the Proposed Regulations, if a taxpayer elects for direct payment for a certain project, the election applies for five consecutive taxable years and cannot be renewed for a second five year term. Taxpayers are allowed one revocation of the direct pay election.

Transferability: Pursuant to new IRC section 6418, taxable entities can elect to transfer all or portions of enumerated tax credits (nearly every credit established/modified by the IRA) to other taxpayers (any U.S. taxpayer) in exchange for cash.

Key Proposed Regulations Direct Pay Provisions (§1.6417-2):

• Direct Pay Election Process: The Proposed Regulations provide extensive details on how taxpayers can elect to receive their excess credit as a direct payment.  In general, a taxpayer must complete a pre-filing registration to the IRS with information about the taxpayer and the project it intends to elect for direct payment. The IRS will then provide the taxpayer with a registration number that the taxpayer will list on the tax return where it makes the direct payment election. Note that receiving a registration number does not mean that the IRS has qualified the project.
• Length of the Direct Payment Election & Revocation: In general, the election for direct payment lasts for a period of five tax years, beginning on the date the facility was originally placed in service. The election may be revoked once. 
• Scope of the Direct Pay Election: The direct pay election applies to the entire amount of the tax credit, meaning a tax payer cannot elect for direct pay for a portion of the credit and transfer the remaining portion.
• Timing of Payment: The direct payment will be treated as made on the date the taxpayer submits a claim for credit or refund.
• Excessive Payment: If the IRS determines it has made an excessive payment to a taxpayer, the taxpayer will have to pay back the excess payment plus 20%.
• Ensuing Years: For credits eligible for direct pay to taxpaying entities, once a taxpayer has received the 5 years of tax credit direct payments, or elected to revoke the direct pay election, it may begin to transfer the credit to third parties under the provisions below. 

Key Proposed Regulations on Transfer Provisions (§1-6418-2):

The Proposed Regulations for the credit transfer provisions are similar to the Proposed Regulations for direct pay.

• Transfer Election Registration Process: For each taxable year for which the taxpayer wishes to make a transfer election, the taxpayer must register eligible pre-filings and provide information regarding the taxpayer and project. The IRS will then issue a registration number, which the taxpayer can then sell to a third party along with all other information necessary to obtain the credit. The registration is valid for only one taxable year.
• Purchase of Credits: The purchase of credits can be made in cash only.
• Scope of the Transfer: Taxpayers may transfer all or a portion of the eligible tax credit to one or multiple unrelated parties. Credits for projects that are receiving a direct payment are not eligible to be transferred. 
• Transfer Election Statement: Once the taxpayer has found a buyer(s), it must complete a transfer election statement along with the transferee, which provides details on the transaction, including price paid and the amount of the credit transferred.  The statement is attached to the transferee’s tax return.  
• No Additional Transfers: For each taxable year, a specific credit or credit portion may only be transferred once and may not be transferred again by the transferee. 
• Ensuing Years: There is no limit to how many years a taxpayer can transfer the tax credit during the years that the applicable credit is in place. The taxpayer is, however, required to follow the registration process for each year a tax credit is transferred.

We are happy to answer questions regarding further details of the direct pay and transferability proposed regulations.

Authored by Jamie Wickett and Ches Garrison.