Highlights
- The U.S. Department of the Treasury and IRS recently released final regulations under Section 6418 of the Internal Revenue Code regarding the transfer of tax credits.
- The regulations are generally consistent with the proposed regulations and provide certainty in several notable areas.
- This Holland & Knight alert reviews key differences in the final regulations and their potential impact on those seeking to take advantage of tax credit transfers.
The U.S. Department of the Treasury and IRS on April 25, 2024, released the final regulations under Section 6418 of the Internal Revenue Code regarding the transfer of tax credits. The final regulations are generally consistent with the proposed regulations and provide taxpayers certainty in several notable areas. (See Holland & Knight's previous alert, "Inflation Reduction Act: Answers to Key Questions on Direct Pay and Transferability," June 26, 2023.) This alert breaks down key differences provided in the final regulations.
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Holland & Knight Insight |
Transfer Mechanics: The final regulations provide clarity
regarding the rules for making the election and payment for
transferred credits.
- Section 6418 requires the buyer to pay cash for the transferred tax credits. The final regulations clarify that the "paid in cash" requirement does not prohibit the buyer from making loans to the transferor taxpayer prior to paying for the transferred tax credits.
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The proposed and final regulations provide that the transfer election must be made on an original tax return. The final regulations provide limited relief on the filing of transfer elections, including avenues for correcting numerical errors and Section 9100 relief in certain circumstances.
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The proposed and final regulations require each credit property to be registered separately on the IRS registration portal. The final regulations clarify that the grouping of credit properties is available for registration numbers to the extent that the controlling code provision otherwise allows grouping. For example, a wind facility with 100 turbines is able to group the turbines and register once. The IRS registration also allows bulk uploads for many other credits. (See Holland & Knight's previous alert, "Inflation Reduction Act Direct Pay and Transfer Pre-Filing Registration Is Open for Business," Feb. 6, 2024.)
Ability to Transfer: The final regulations also provide clarity on the ability of the eligible taxpayer to transfer the credits and the buyer to purchase the credits.
- With respect to the Section 45Q carbon capture and sequestration credit, the final regulations provide that the transfer election may be made by any taxpayer who owns a component of carbon capture equipment within a single process train. Further, the final regulations clarify that the person who disposes of and utilizes the qualified carbon oxide is not eligible to elect to transfer the tax credits.
- The proposed regulations provided for an anti-abuse rule wherein a taxpayer transfers tax credits with the principal purpose of tax avoidance. The final regulations clarify that the anti-abuse rule applies if there is a principal purpose of tax avoidance.
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The proposed regulations provided that the Section 469 passive activity rule applies to limit the ability of a buyer to use the tax credits. The final regulations clarify that a transferee taxpayer who directly owns an interest in an eligible taxpayer's trade or business at the time the work was done (as required for the material participation rules) is not deemed to fail the requirements of Section 469(h).
Excessive Credit Transfers and Recapture
- An excessive credit transfer is the excess of the credit amount claimed on a tax return over the amount allowed. The final regulations clarify that payments made by a transferee taxpayer to an eligible taxpayer that directly relate to the excessive credit transfer is not precluded from a deduction with respect to the portion of the consideration paid for a specified credit portion that relates to an excessive credit transfer. The final regulations provide that a payment that directly relates to an excessive credit transfer is equal to the total consideration paid in cash by the transferee taxpayer for its specified credit portion multiplied by the ratio of the amount of the excessive credit transferred to the transferee taxpayer to the amount of the transferred specified credit portion claimed by the transferee taxpayer.
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Excessive Credit Transfer |
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One transferee |
The amount of the transferred specified credit portion claimed by the transferee over the amount of the eligible credit that, without the application of Section 6418, would be otherwise allowable. |
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Multiple transferees |
The amount of excessive credit transferred to a specific transferee taxpayer is equal to the total excessive credit transferred multiplied by the ratio of the transferee taxpayer's portion of the total specified credit to the total specified credit portions transferred to all transferees. |
The final regulations clarify the allocation of recapture between the transferor taxpayer and transferee taxpayer when not all of the investment tax credit subject to recapture was transferred.
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Recapture |
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Recapture where transferor retains tax credits |
The amount of the tax increase under Section 50(a) that the transferor is responsible for equals the recapture amount multiplied by a fraction, the numerator of which is the total credit amount that the eligible taxpayer retained and the denominator of which is the total credit amount determined for the eligible credit property. The transferee taxpayer(s) are responsible for the remaining portion of the recapture amount. |
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Impact of partner recapture |
The transferee taxpayer is not liable for recapture liability caused by a disposition by a partner of its interest in the transferor taxpayer. The partner's recapture amount reduces the remaining recapture amount to which a transferee taxpayer and eligible taxpayer is liable. The amount of the reduction to the transferee taxpayer is proportionate to the amount of the tax increase for the transferred specified credit portion (based on the partner's distributive share resulting from the transfer). |
Special Circumstances
- The final regulations clarify that eligible credits that have not yet been transferred pursuant to Section 6418 are disregarded for purposes of the REIT Asset Test. The transfer of a specified credit portion pursuant to a valid Section 6418 election is not a sale of property for purposes of Section 857(b)(6)(C)(iii) and Section 857(b)(6)(D)(iv).
- The preamble to the final regulations clarifies that an eligible taxpayer is not subject to the normalization rules with respect to any cash paid by a transferee taxpayer for a specified credit portion. Any portion of an eligible credit that is not transferred, however, would remain subject to the normalization rules as applicable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.