Selling Tax Credits: How Does the Process Work?

The practice of selling federal tax credits, known as “transferability,” was expanded by the Inflation Reduction Act (IRA) of 2022. This legislation allows businesses that earn certain tax credits to sell them to other taxpayers for cash. This mechanism provides a way for companies, especially those in the clean energy sector, to gain immediate capital from the credits they generate, even if they lack sufficient tax liability to use the credits themselves. The ability to sell credits directly in a one-time transaction simplifies the process, broadens the base of potential buyers, and allows the original generator of the credit to retain full ownership of their project.

Eligible Tax Credits for Transfer

The option to sell tax credits is not available for all federal credits; eligibility is restricted to a specific list, primarily focused on clean energy and domestic manufacturing. The Inflation Reduction Act identified several credits that can be transferred. These credits must have been generated in 2023 or later to qualify for a sale.

Transferable credits include:

• The Production Tax Credit (PTC), which provides a per-kilowatt-hour incentive for electricity generated from renewable resources.
• The Investment Tax Credit (ITC), which is based on the investment in renewable energy property, such as solar or wind facilities.
• The Advanced Manufacturing Production Credit, known as Section 45X, which supports the domestic production of clean energy components.
• The Section 45Q credit for Carbon Oxide Sequestration, which incentivizes projects that capture and securely store carbon dioxide.
• The Section 30C Alternative Fuel Vehicle Refueling Property Credit, which supports the installation of infrastructure like electric vehicle charging stations.

Key Participants and Their Roles

The sale of tax credits involves two main parties: the seller, referred to as the “eligible taxpayer,” and the buyer, known as the “transferee taxpayer.” The eligible taxpayer is the entity that conducted the activities to generate the tax credit, such as developing a clean energy project. These sellers are often companies that do not have enough taxable income to use the full value of the credits they have earned, making a cash sale a more attractive option than carrying the credits forward.

On the other side of the transaction is the transferee taxpayer. A buyer can be any unrelated business or individual that has a federal tax liability they wish to reduce. Their primary motivation is to purchase credits at a discount—paying less than the face value of the credit—to lower their own tax bill, for example, paying 90 cents for a dollar’s worth of tax credit.

Information and Documentation for the Transfer

Before a tax credit can be sold, a mandatory first step for the seller is completing a pre-filing registration with the Internal Revenue Service (IRS). This is done through the IRS’s “Energy Credits Online” portal and is a prerequisite for making a valid transfer. The purpose of this registration is to provide the IRS with upfront information about the credit-generating property and the taxpayer who earned it.

During the pre-filing registration, the seller must provide their taxpayer identification information, the type of tax credit being transferred, the taxable year the credit was generated, and information about the qualifying facility. Once the IRS processes this information, it issues a unique registration number for each credit-generating property.

The second piece of documentation is the “transfer election statement.” This document serves as the official record of the sale and is prepared by the seller to be shared with the buyer. It must contain the registration number from the pre-filing process, the names and contact information for both parties, the amount of the credit being transferred, and the cash consideration paid.

The Transaction and Reporting Process

Once the preparatory documentation is in order, the parties can proceed with the sale. Sellers can find potential buyers through various channels, including specialized brokers or online marketplaces. The parties negotiate a price, which is typically a percentage of the credit’s face value, and execute a formal purchase and sale agreement to legally document the terms.

After the sale is complete, the reporting process begins with the filing of annual tax returns. The seller is required to attach the transfer election statement to their tax return for the year in which the credit was sold. This filing officially informs the IRS of the transfer, and the election is irrevocable.

The buyer’s reporting obligations mirror the seller’s. The buyer takes the transfer election statement they received and attaches it to their own federal tax return. They then claim the purchased credit on Form 3800, General Business Credit, and the statement serves as their proof of right to claim the credit.

Tax Consequences of the Transaction

The tax implications of selling credits are distinct for the seller and the buyer. For the seller, the cash payment received from the sale is excluded from their gross income and is not subject to federal income tax. To prevent a double benefit, the seller is not permitted to claim any tax deduction for the expenses that generated the credit, up to the amount of the credit sold.

For the buyer, the primary benefit is using the purchased credit to directly reduce their federal tax liability. The amount paid to acquire the credit is not deductible as a business expense, as the buyer’s tax benefit is limited to the value of the credit itself when applied against their taxes.

Any unused portion of a purchased credit is subject to a three-year carryback and a 22-year carryforward period. For certain buyers, such as individuals and closely held corporations, the use of these credits may be limited by passive activity rules. The buyer also assumes the risk of the credit being disallowed or recaptured by the IRS upon audit.