Can You Sell Tax Credits? Here’s How It Works

Yes, you can sell certain federal tax credits. This process, known as transferability, allows an eligible taxpayer to sell their tax credits to an unrelated taxpayer for cash. A tax credit is a dollar-for-dollar reduction of a taxpayer’s income tax liability. This ability to sell them is a shift, as credits were traditionally only valuable to the entity that generated them, provided they had enough tax liability to use the credit.

Recent legislation made this possible for a specific set of clean energy credits. This allows project developers and manufacturers to receive immediate cash for credits they might not be able to use themselves. The cash received from the sale is not considered taxable income for the seller, unless the credit amount is later determined to be excessive. This has created a market allowing businesses with large tax bills to purchase credits and reduce their own taxes.

Eligible Transferable Tax Credits

A specific list of eleven clean energy and manufacturing tax credits are now eligible for transfer. These were established or expanded by the Inflation Reduction Act, which introduced Section 6418 to the Internal Revenue Code, authorizing these sales. The credits are designed to incentivize investment in domestic clean energy production and manufacturing. They can be broadly categorized into credits for renewable energy generation, clean fuel production, and energy-efficient manufacturing.

Two of the most prominent transferable credits are the Production Tax Credit (PTC), which is earned for each kilowatt-hour of electricity generated from sources like wind and solar, and the Investment Tax Credit (ITC), which provides a credit based on the investment in renewable energy facilities. The law also introduced successor credits, the Clean Electricity Production Credit and the Clean Electricity Investment Credit, which are also transferable. These are foundational credits for renewable project developers who can now sell them to finance their operations.

Other transferable credits target different parts of the clean energy supply chain. The Advanced Manufacturing Production Credit is for the domestic production of components like solar panels and wind turbines. The Qualifying Advanced Energy Project Credit supports investments in manufacturing facilities that produce renewable energy equipment. Credits are also available for specific fuels, such as the Clean Hydrogen Production Credit and the Clean Fuel Production Credit.

Additional credits focus on specific technologies and environmental goals. The credit for carbon oxide sequestration incentivizes capturing and storing carbon emissions. The Zero-Emission Nuclear Power Production Credit supports existing nuclear facilities. Finally, the Alternative Fuel Vehicle Refueling Property Credit is available for businesses that install charging or refueling equipment.

The Tax Credit Marketplace

The ability to sell tax credits has given rise to a marketplace composed of sellers, buyers, and intermediaries. Sellers are the entities that generate the credits, such as renewable energy developers or clean-tech manufacturers. Their motivation for selling is a lack of sufficient tax liability to utilize the credits themselves, so they sell them to convert a future tax benefit into immediate cash for project funding.

On the other side of the transaction are buyers, who are large corporations with substantial federal tax liabilities. These companies purchase the credits to reduce their own tax bills. The incentive for a buyer is financial; they can purchase credits for less than their face value, for example, paying 90 to 95 cents for a dollar’s worth of tax credits.

Connecting these two parties are various intermediaries, including specialized brokers, tax advisory firms, and online platforms. These intermediaries assist with sourcing credits, performing due diligence, structuring the deals, and ensuring regulatory compliance for both the buyer and seller.

The pricing of tax credits is determined by supply and demand, but they are always sold at a discount. This discount reflects the time value of money, transaction costs, and the risk transferred to the buyer. The buyer assumes the risk that the IRS could later challenge the validity or amount of the credit.

Information Required for a Tax Credit Transfer

Before a tax credit can be sold, the seller must complete a preparatory step with the IRS. This involves a pre-filing registration process through a dedicated IRS online portal. The purpose of this registration is to provide the IRS with details about the project and to receive a unique registration number, which is a prerequisite for a valid transfer.

During the pre-filing registration, the seller must provide specific information about the project. This includes identifying the type of credit, the physical location of the facility, the date it was placed in service, and an estimate of the total credit amount. The IRS uses this information to track the credit and help prevent fraudulent claims.

Once the registration number is obtained, the seller and buyer must execute a “transfer election statement.” This legal document formalizes the sale and must include the names and taxpayer identification numbers (TINs) of both parties. The statement also needs to describe the specific credit, the tax year it was generated, the exact dollar amount sold, and the cash consideration paid.

The seller must also maintain comprehensive documentation to substantiate the original eligibility for and the amount of the tax credit. This includes records of project costs, placed-in-service dates, and any calculations used to determine the credit amount. These records are necessary in the event of an IRS audit.

The Transfer and Filing Process

After the transfer election statement is finalized, both the seller and buyer must take specific actions on their annual tax returns. The seller initiates this by making the transfer election on their return for the tax year in which the credit was generated. This is done using Form 3800, General Business Credit, or the source form for the specific credit.

The seller is required to attach the completed transfer election statement to their tax return. The seller must also include the unique registration number received from the IRS pre-filing portal on their return. This number links the tax filing back to the specific registered project, allowing the IRS to verify the transfer.

The buyer’s filing process mirrors the seller’s. The buyer claims the purchased credit on their own tax return and will also use Form 3800 to apply the credit against their tax liability. The buyer must attach the exact same transfer election statement they received from the seller to their return.

The IRS processes the returns to validate the transaction by cross-referencing the registration number and the details on the transfer election statements. If a buyer cannot use the full amount of the purchased credits in a single tax year, the unused portion can be carried forward for up to 22 years but cannot be carried back. A credit can only be sold once; the buyer cannot resell it.