IRS RELEASES GUIDANCE ON TRANSFERABILITY OF TAX CREDITS

On June 14th, the IRS released new guidance on the expanded tax credit market, offering clarity on various aspects, including:

Transferability Eligibility:

• Tax credits eligible for transferability can be purchased by any taxpayer, except tax-exempt organizations, opening the market to big corporations with significant tax liability. However, individuals can only use credits to offset income from specific projects, likely excluding them from being tax credit buyers.
• Buyers can carry back the tax credits they buy for up to three years and use them to recover taxes paid in the past.
• Tax credits can only be sold once. Thus, a buyer cannot resell the tax credits it purchases. Tax credits that a project owner has assigned to another party cannot be sold.

Timing & Tracking: Each project or facility will be assigned a tax credit registration number for documentation purposes. The sale of tax credits can occur at any time throughout the year before taxes are filed, reducing timing delays. However, direct payments will be made after taxes are filed and processed.

Splitting Credits: Project developers can divide tax credits to sell them to multiple buyers, but the guidance clarifies that bonus credits (“adders”) cannot be separated and sold independently.

Recapture Risk: The responsibility for repayment in the event of a recapture of credits falls on the buyer, except when ownership of a project changes after tax credits have been purchased. The buyer remains unaffected as long as the project continues operating. Only the unvested tax credits can be recaptured.

Disallowance: The IRS is authorized to collect a penalty of 120% of a tax credit that is later disallowed for any reason (e.g. inflated tax basis, inadequate use of required labor and wages, etc.). The tax credit buyer is responsible for any disallowance and associated penalties, making it important the buyer does the diligence necessary on the project.

Overall, despite some remaining questions, the updated guidance enables investors, developers, and startup marketplaces to leverage the expanded tax credit market and initiate projects. The public comment period has commenced and will last through August 14, 2023.