Selling Solar Tax Credits: How the Process Works

The Inflation Reduction Act of 2022 introduced a change for those investing in clean energy, allowing for the sale of certain tax credits. This mechanism, known as transferability, creates a pathway for individuals and businesses to receive a direct cash benefit from their solar installations. Previously, monetizing these credits often involved complex tax equity financing structures that were inaccessible to many. Now, the ability to sell credits provides a more straightforward way to realize their value.

This approach effectively creates a private market for clean energy tax credits. It allows the original owner of the credit to transfer it to an unrelated taxpayer in exchange for cash, which helps simplify the financing for clean energy projects.

Seller and Project Eligibility

To sell a solar tax credit, both the taxpayer and the project must meet specific criteria. The sellers are generally taxpayers who are not tax-exempt entities. This group includes individuals, C corporations, S corporations, and partnerships. Tax-exempt organizations and government entities are not eligible to sell their credits on the private market as they typically use a different system called “direct pay” to receive a cash payment from the IRS.

The energy project itself must also qualify. For a solar project, this means the system must be considered “placed in service,” or ready and available for its specific use, in the 2023 tax year or later to be eligible for transfer. The transferability rules apply to a specific list of clean energy credits, including the energy credit under Section 48, which covers solar property.

The rules prevent a credit from being sold more than once, and the transaction must be between unrelated parties to prevent abuse of the system.

Calculating Credit Value and Sale Price

Determining the value of a solar tax credit begins with a calculation based on the project’s cost. The Investment Tax Credit (ITC) is generally 30% of the total qualifying expenditures for the solar energy system. For instance, if a business invests $200,000 in a qualifying solar panel installation, the face value of the tax credit would be $60,000. This is the full amount of the credit the owner could have claimed against their own tax liability.

When selling the credit, the owner will not receive its full face value. Instead, credits are sold at a discount. A buyer with a significant tax liability can purchase a $60,000 credit for less than its worth, thereby lowering their tax bill for a net savings. The sale price is a result of negotiation and market conditions, but sellers can expect to receive between 85 and 95 cents on the dollar.

Using the prior example, a $60,000 tax credit might sell for a price ranging from $51,000 to $57,000. The exact price can depend on factors like the size of the credit, the timing of the sale, and the overall demand from buyers.

The Step-by-Step Transfer Process

Before a tax credit can be sold, the seller must compile a comprehensive set of information and complete a pre-filing registration with the IRS through its dedicated online portal. This registration is mandatory for all transfers. To complete the registration, the seller must provide specific details about the tax credit and the associated project. This includes a clear description of the credit being transferred, the taxpayer’s identifying information, the total cost of the solar property, and the exact date the property was placed in service. This information is used to calculate the precise amount of the tax credit and also acts as a due diligence package for prospective buyers.

Upon successful submission, the IRS issues a unique registration number for that specific credit. With a registration number in hand, the next step is to find a buyer. Sellers can connect with buyers through various channels, including specialized online marketplaces and brokerage firms that have emerged to facilitate these transactions. These platforms connect credit sellers with corporations and individuals looking to purchase credits to offset their tax liabilities, streamlining the matching process.

After a buyer is identified and a price is agreed upon, the sale is executed through a formal purchase and sale agreement. The seller provides the buyer with the IRS-issued registration number, and in return, the buyer makes the cash payment for the credit. The final piece of the process involves documentation for tax filing purposes; both parties must agree to complete a “transfer election statement,” which formalizes the transaction with the IRS.

Tax Reporting Requirements for the Seller

After the sale is complete, the seller has specific obligations for their annual tax filing. A main consideration is the tax treatment of the funds received from the buyer. According to IRS guidance, the cash payment received for the sale of the tax credit is not considered taxable income to the seller, which makes the transaction more financially attractive.

To finalize the transfer from a compliance perspective, the seller must file a tax return for the year in which the transfer occurred. Attached to this return must be a document known as the “transfer election statement.” This statement, which is also provided to the buyer, formally notifies the IRS that the seller has elected to transfer the credit. It includes the registration number obtained from the pre-filing process and other details of the transaction.

By filing this statement, the seller officially relinquishes their right to claim the solar tax credit on their own return. This action completes their reporting duties and ensures the IRS has a clear record of which taxpayer—the buyer—is authorized to claim the credit. Failure to properly file this statement can jeopardize the validity of the transfer.