The U.S. Department of the Treasury and the IRS issued final rules on Thursday for the tax credit transferability mechanism included in the Inflation Reduction Act, offering clarity to the already active tax credit market.
“Until the Inflation Reduction Act introduced these new credit delivery mechanisms, governments, many types of tax-exempt organizations, and many businesses could not fully benefit from tax credits like those that incentivize clean energy construction,” Treasury said in a press release.
The final guidance has been posted to the Federal Register but won’t be published until April 30. It adopts revised versions of the regulations proposed last June, and removes temporary regulations that were identical to the proposed rules and that Treasury issued contemporaneously.
The transferability provision allows businesses to transfer “all or a portion of any of” 11 clean energy tax credits to a third party in exchange for tax-free cash, Treasury said, “so that businesses can take advantage of tax incentives if they do not have sufficient tax liability to fully utilize the credits themselves.”
This applies to the 30C alternative fuel refueling property credit; the Section 45 renewable electricity production credit; the 45Q carbon oxide sequestration credit; the 45U zero-emission nuclear power production credit; the 45V clean hydrogen production credit; the 45X advanced manufacturing production credit; the 45Y clean energy production credit; the 45Z clean fuel production credit; the Section 48 energy credit; the 48C qualifying advanced energy project credit; and the 48E clean electricity investment credit.
While a multi-year market for transferable tax credits is “already well underway,” the final guidance would provide more clarity on “this key tool for financing clean energy and manufacturing here in the U.S.,” Crux CEO Alfred Johnson said in an email. Crux is a finance technology company that connects tax credit buyers and sellers. “With these final rules set, we expect to see the market continue to accelerate rapidly,” Johnson added.
The transferability provision is one of two new credit delivery systems the IRA established, along with the elective pay provision, also known as direct pay. Treasury issued final guidance for that in March.
Both mechanisms are designed to allow “state, local, and Tribal governments; non-profit organizations; Puerto Rico and other U.S. territories; and many more businesses to take advantage of clean energy tax credits,” Treasury said.
“It is difficult to overstate the significance of [this] announcement for the clean energy market. Transferability is a powerful tool that broadens the reach of clean energy tax credits and expands the supply of available financing for the energy transition,” American Council on Renewable Energy President and CEO Ray Long said in a Thursday statement. The final rules, Long said, will “open the door to tens of billions of dollars in additional annual clean energy investments and attract more diverse participants into the market.”
The clean energy industry is still awaiting final guidance on several other IRA provisions — including the domestic content tax credit bonus, the Section 48 investment tax credit and the 45Y clean electricity production credit.
