by Steven Pashley and Bergin Fisniku
One of the stated goals of the Biden administration is to address climate change. As part of this effort, the recently enacted Inflation Reduction Act of 2022 includes several new tax provisions intended to expand clean energy federal tax credits to groups that were previously unable to utilize such credits.
Taking effect in 2023, Internal Revenue Code (“IRC”) § 6417 provides applicable taxpayers with the ability to receive direct cash payments in lieu of claiming a variety of clean energy tax credits. Essentially, this provision makes the credits refundable, meaning that taxpayers can receive the value of the credits even if they do not have sufficient tax liability to offset.
While the direct payment feature is certainly a positive development, it is important to note that a majority of the clean energy credits eligible for section § 6417 treatment only apply to the following groups: tax-exempt organizations; states and political subdivisions; the Tennessee Valley Authority; Indian tribal governments; Alaska Native Corporations; and cooperative corporations that furnish electricity to people in rural areas. Nevertheless, the direct pay election is available to all taxpayers for a narrower set of clean energy credits: the §45V clean hydrogen production credit, the §45Q carbon oxide sequestration credit, and the §45X advanced manufacturing production credit.
While § 6417 should benefit the aforementioned groups, there is some uncertainty regarding whether the provisions apply to colleges and universities that may be considered “instrumentalities of their state” and are not 501(c)(3) tax-exempt entities. The definitional provisions of § 6417 does not include “instrumentalities.” This omission could adversely impact state hospitals, colleges, and universities to the extent they are considered instrumentalities of their state. Until additional guidance is issued, any entity that could be considered an instrumentality of a state should be aware of the omission and evaluate their eligibility carefully.
Also taking effect in 2023, IRC § 6418 provides taxpayers the ability to transfer/sell their clean energy credits. This could be especially beneficial for developers of large clean energy projects that may not generate sufficient taxable income to utilize the credits. In the past, project developers have come to rely on complex tax equity structures like partnership flips and sale-leasebacks that allocate credits to outside investors for a set time period. These structures are expensive, time consuming to create, and contain recapture provisions that can be triggered if the investment is disposed of or transferred.
Section 6418 simplifies the process by allowing a taxpayer to sell the credits to unrelated third parties and the sale is tax-free. A credit can only be transferred once and cannot be transferred to an entity that is eligible for the direct pay election under § 6417. To reiterate, the seller of the credits does not recognize income on the sale, but the buyer of the credits is not entitled to a deduction for the consideration paid. The US Treasury and the IRS have recently announced a plan to launch a registry late this year to assist taxpayers seeking to monetize credits pursuant to §§ 6417 or 6418 and provide taxpayer access to such credits.
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.