The Transfer of Tax Credits Under IRC Section 6418

Internal Revenue Code (IRC) Section 6418, introduced by the Inflation Reduction Act of 2022, created a new mechanism for monetizing certain clean energy tax credits. This provision allows the entity that generates a qualifying tax credit to sell all or a portion of it to an unrelated party for cash. This transferability allows developers and producers who may not have sufficient tax liability to use the credits themselves to receive an immediate cash benefit. The buyer can use these purchased credits to offset their own federal tax liability, typically acquiring them at a discount.

Eligible Credits and Taxpayers

The transferability election under Section 6418 is restricted to a specific list of clean energy incentives. These eligible credits include:

• Production tax credits for renewable electricity (Section 45), clean hydrogen (Section 45V), and zero-emission nuclear power (Section 45U).
• Investment tax credits for energy property (Section 48), qualifying advanced energy projects (Section 48C), and clean electricity investments (Section 48E).
• Credits for carbon oxide sequestration (Section 45Q), advanced manufacturing production (Section 45X), and clean fuel production (Section 45Z).
• Clean vehicle credits (Section 25E and 45W) and the alternative fuel vehicle refueling property credit (Section 30C).

The transaction involves an “eligible taxpayer” and a “transferee taxpayer.” An eligible taxpayer is any taxpayer, including partnerships and S corporations, that generates one of the qualifying credits. This includes entities such as tax-exempt organizations, state and local governments, Indian tribal governments, and rural electric cooperatives.

The transferee taxpayer is the buyer of the credit and must not be related to the eligible taxpayer, as defined under IRC Sections 267 and 707. The market is largely dominated by C-corporations, as passive activity rules can limit the use of these credits for many individuals and other types of entities.

Tax Consequences of the Transfer

For the eligible taxpayer selling the credit, the cash received is excluded from their gross income for federal tax purposes. This allows the seller to monetize the credit without an associated income tax burden. Any amount the seller pays in connection with the transfer is not deductible.

For the transferee taxpayer who buys the credit, the cash paid is not a deductible expense. The buyer is treated as the taxpayer who originally generated the credit for the purpose of claiming it. The credit is taken into account in the buyer’s first taxable year that ends with or after the seller’s taxable year in which the credit was determined. Unused credits can generally be carried back three years or carried forward for up to 22 years.

A specific rule applies to investment-related credits, such as those under Section 48. The seller of an investment tax credit remains subject to recapture rules if the underlying property is disposed of or ceases to be investment credit property within a five-year period. The seller must notify the buyer of a recapture event, and the buyer is then liable for the recaptured amount, which makes due diligence on the seller’s project a focus in these transactions.

Information and Registration for the Transfer

Before a transfer can be finalized, taxpayers must complete a mandatory pre-filing registration with the IRS through its online portal. This must be done for each eligible credit property and requires project details like the credit type, location, and anticipated credit amount. Upon successful registration, the IRS issues a unique registration number for the property, which is required to make a valid transfer election.

The seller and buyer must also execute a written “Transfer Election Statement.” This document must contain the names and taxpayer identification numbers of both parties, the type and amount of the credit being transferred, the cash consideration paid, and the unique registration number from the IRS.

Executing the Transfer on the Tax Return

The election to transfer a credit must be made on an original, timely filed return, including extensions, for the year the credit is determined. The election cannot be made for the first time on an amended return and is irrevocable.

The eligible taxpayer, or seller, files the relevant source credit form, such as Form 3468 for investment credits, to determine the amount of the credit. Both the seller and buyer must attach their copy of the Transfer Election Statement to their respective tax returns. The seller’s return must include the registration number to document the transfer, and the buyer uses this same number on their return, typically Form 3800, to claim the credit.