Detailed guide to IRS Section 6418 requirements, registration process, and compliance for transferable tax credits.
Section 6418 of the Internal Revenue Code, enacted as part of the Inflation Reduction Act of 2022, fundamentally transformed how clean energy tax credits work in the United States. For the first time in history, this provision allows eligible taxpayers to transfer (sell) certain clean energy tax credits to unrelated third parties for cash consideration. This creates a true marketplace for tax credits and significantly improves project economics for renewable energy developers.
Section 6418 became effective for tax years beginning after December 31, 2022, and applies to credits from projects placed in service after that date. The provision transforms what was previously a complex tax equity financing structure into a straightforward sale transaction, opening clean energy investment to a much broader pool of buyers.
Understanding Section 6418 is critical whether you’re selling tax credits as a project developer or purchasing them as a corporate buyer. The rules are strict, the documentation requirements are extensive, and non-compliance can result in credit disallowance, penalties, and potential recapture. This guide explains everything you need to know about Section 6418 compliance.
Section 6418 permits eligible taxpayers who own clean energy projects to transfer all or a portion of their eligible tax credits to one or more unrelated parties in exchange for cash. This is a sale transaction, not a partnership flip, lease, or traditional tax equity structure.
The transfer is permanent and irrevocable. Once transferred, the buyer becomes the rightful owner of the credit and reports it on their tax return. The seller loses all rights to claim the credit, even if the buyer fails to pay or the transaction falls through (subject to recapture provisions).
1. Cash Consideration Requirement
Section 6418 mandates that all transfers must be made for cash consideration. The statute explicitly prohibits: - Exchanges for services or property - Debt forgiveness as consideration - Contingent payment structures - Options or rights to future credits
The IRS has clarified that “cash” means actual monetary payment. Promissory notes, offsets against unrelated obligations, and other non-cash arrangements do not qualify. The consideration paid must be documented and can affect the seller’s tax treatment under Section 6418(b)(2).
2. Single Transfer Limitation (The “One-and-Done” Rule)
Each eligible credit may be transferred only once. Once a credit has been transferred from the original eligible taxpayer to a buyer, that buyer cannot re-transfer the credit to another party. This prevents the creation of a secondary market for credits and ensures IRS can track the chain of ownership.
Key implications: - Buyers cannot “flip” credits they purchase - Credits must be used by the buyer who acquires them - Partial transfers to multiple buyers are permitted, but each portion can only be transferred once - The one-transfer rule applies per taxable year for credits that span multiple years (like PTCs)
3. Unrelated Party Requirement
Transfers under Section 6418 are only permitted to unrelated parties. The IRS applies the related party definitions from Section 267(b) and Section 707(b)(1), which include:
What this means in practice: Project developers cannot transfer credits to: - Their parent company or subsidiaries - Affiliated entities under common control - Partners in the project LLC (with certain exceptions) - Family members or family-controlled entities
The IRS requires certification that the buyer is an unrelated party. Some transactions that appear arm’s-length may still violate this rule if common ownership or control exists.
4. Excessive Credit Limitation
Section 6418(g) imposes an excessive credit penalty if the taxpayer transfers more credit than they’re entitled to claim. This occurs when: - The credit calculation was overstated - Eligible basis was inflated - Documentation was insufficient to support the claimed amount - Bonus adders weren’t actually earned
If an excessive credit transfer occurs: - The seller is liable for the excess amount plus a 20% penalty - The buyer may also face recapture if they knew or should have known - Both parties must amend their tax returns
This provision puts significant risk on sellers to ensure their credit calculations are accurate before transferring. Conservative underwriting and third-party verification are essential.
Before transferring any credits under Section 6418, eligible taxpayers must complete the IRS pre-filing registration process. This is a mandatory step that occurs before the taxpayer files their tax return claiming or transferring the credit.
Critical timing rule: Registration must be completed during the tax year in which the credit is determined, or in certain cases, within specific windows announced by the IRS.
The IRS established an online pre-filing registration portal specifically for Section 6418 transfers. Access the portal through the IRS.gov website under the “Clean Energy Tax Credits” section.
Portal requirements: - IRS.gov account with identity verification - Employer Identification Number (EIN) for the eligible taxpayer - Detailed project and credit information - Buyer information (for transfers)
Information required during registration:
Upon successful completion of pre-filing registration, the IRS issues a unique registration number in the format: XXXXXXXXXX-YYYY where:
- XXXXXXXXXX = 10-digit identifier
- YYYY = Tax year
This registration number must be: - Reported on Form 3800 (General Business Credit) - Provided to the credit buyer - Included in transfer documentation - Retained in project records
IMPORTANT: The registration number does not constitute IRS approval of the credit amount or eligibility. It simply confirms that the taxpayer has provided the required pre-filing information. The IRS may still audit and adjust the credit upon examination.
For production tax credits (PTCs) that generate credits over 10 years, separate registration is required for each tax year.
For example, a wind project with a Section 45Y PTC must: - Register in Year 1 before transferring Year 1 credits - Register again in Year 2 for Year 2 credits - Continue through all 10 years of the credit period
Each year’s registration receives a unique registration number. Buyers may purchase credits from a single year or multiple years, but each year requires separate registration and transfer documentation.
The IRS has provided limited relief for late registrations in initial guidance. However, relying on relief is risky. Best practice is to complete registration well before the tax filing deadline.
Safe harbor approach: - Complete registration at least 60 days before filing deadline - Allow time for IRS system processing - Have backup documentation if portal issues arise
Section 6418 applies to specific clean energy tax credits enumerated in the statute. Not all renewable energy credits are transferable.
Section 48: Energy Investment Tax Credit (Pre-2025 Projects) - Technology: Solar, fuel cells, small wind, geothermal, microturbines, combined heat and power - IRS Form: Form 3468, Part IV - Credit Rate: 30% (with prevailing wage) or 6% (without) - Bonus Adders: +10% domestic content, +10% energy community - Status: Applies to projects placed in service before January 1, 2025 - Note: For projects placed in service after December 31, 2024, use Section 48E instead
Section 48E: Clean Electricity Investment Credit (2025+ Projects) - Technology: Broad category of zero-emission electricity generation - IRS Form: Form 3468, Part V - Credit Rate: 30% (with prevailing wage) or 6% (without) - Bonus Adders: +10% domestic content, +10% energy community, +10-20% low-income community - Placed in Service: January 1, 2025 or later - Note: This is the successor to Section 48 and applies to new solar, wind, storage, and other clean energy projects
Section 48C: Qualifying Advanced Energy Project Credit - Technology: Manufacturing facilities for clean energy equipment and components - IRS Form: Form 3468, Part VI - Credit Rate: 30% of qualified investment - Special Rule: Requires IRS certification and allocation through competitive program - Note: Limited allocation available; must apply during allocation rounds
Section 45: Renewable Electricity Production Credit (Pre-2025) - Technology: Wind, closed-loop biomass, geothermal, small irrigation, hydropower, marine and hydrokinetic - IRS Form: Form 8835 - Credit Rate: Inflation-adjusted per kWh (approximately $0.0275/kWh for 2024) - Credit Period: 10 years from placed-in-service date - Status: Being phased out; use Section 45Y for new projects - Annual Transfer: Each year’s production credit can be transferred separately
Section 45Y: Clean Electricity Production Credit (2025+ Projects) - Technology: Facilities that produce electricity with zero or near-zero greenhouse gas emissions - IRS Form: Form 8835 (updated for 45Y) - Credit Rate: Base rate adjusted for prevailing wage (approximately $0.0275/kWh with prevailing wage, $0.0055/kWh without) - Credit Period: 10 years - Bonus Adders: +10% domestic content, +10% energy community - Note: This replaces Section 45 for facilities placed in service after December 31, 2024
Section 45Q: Carbon Oxide Sequestration Credit - Technology: Carbon capture, utilization, and storage (CCUS) - IRS Form: Form 8933 - Credit Rate: Up to $85/metric ton for permanent storage, $60/metric ton for utilization (2024 rates, adjusted for inflation) - Credit Period: 12 years - Special Requirements: - Minimum capture thresholds (varies by facility type) - Secure geological storage verification - Annual reporting to EPA and IRS - Third-party verification of captured amounts
Section 45V: Clean Hydrogen Production Credit - Technology: Qualified clean hydrogen production - IRS Form: Form 7210 - Credit Rate: Up to $3.00/kg, scaled based on lifecycle greenhouse gas emissions - Tiers: - 0.45-1.5 kg CO2e/kg H2: $0.60/kg - 1.5-2.5 kg CO2e/kg H2: $0.75/kg - 2.5-4.0 kg CO2e/kg H2: $1.00/kg - <0.45 kg CO2e/kg H2: $3.00/kg - Credit Period: 10 years - Special Requirements: - Lifecycle emissions analysis required - Annual verification of emissions rate - Prevailing wage requirements for full credit
Section 45X: Advanced Manufacturing Production Credit - Technology: Manufacturing of clean energy components - IRS Form: Form 7207 - Credit Components: Solar, wind, battery, critical minerals - Credit Rate: Varies by component type (e.g., $12/kWh for battery cells, $7/square meter for solar modules) - Special Rules: - Production must occur in the United States - Components must be sold to unrelated parties - Cannot claim for same property that receives Section 48C credit
Section 45Z: Clean Fuel Production Credit (Effective 2025) - Technology: Transportation fuels with lower lifecycle emissions than petroleum - IRS Form: To be determined - Credit Rate: Based on emissions reduction relative to baseline - Note: Replaces biodiesel and renewable diesel credits under Sections 40A and 6426
Section 30C: Alternative Fuel Vehicle Refueling Property Credit - Technology: EV charging stations, hydrogen refueling equipment - Credit Rate: 30% of cost (up to $100,000 per item) - Requirements: Located in low-income or non-urban areas for full credit
Section 25C: Energy Efficient Home Improvement Credit (Residential) - Technology: Residential energy efficiency improvements - Note: Generally not transferred in practice due to residential nature
Section 25D: Residential Clean Energy Credit - Technology: Residential solar, wind, geothermal - Note: Typically claimed by homeowners, not transferred
The following credits cannot be transferred under Section 6418: - Section 30D: Clean Vehicle Credit (electric vehicles) - Section 45L: New Energy Efficient Home Credit - Section 45U: Zero-Emission Nuclear Production Credit (has separate transfer rules) - Section 48D: Advanced Manufacturing Investment Credit - Research and development credits - Foreign tax credits - Any credit not specifically enumerated in Section 6418(f)
Important: Always verify the specific code section and eligibility before attempting a transfer. Using the wrong section or attempting to transfer ineligible credits can result in penalties.
Section 6418(a)(3) states unambiguously: “No credit shall be transferred more than once.”
What this means: - The original eligible taxpayer (project owner) can transfer to Buyer A - Buyer A cannot transfer to Buyer B - If Buyer A cannot use the credit, it’s wasted - There is no secondary market for 6418 credits
Practical implications for buyers: - Must have sufficient tax liability to absorb credits - Cannot resell if circumstances change - Should model tax capacity carefully before purchasing - May want to structure purchase over multiple years to manage utilization
Partial transfers are allowed: - Seller can transfer 40% to Buyer A and 60% to Buyer B - Each buyer receives their portion permanently - Neither buyer can re-transfer their portion - Seller cannot later transfer the untransferred portion to a third party in a subsequent year
Multi-year credits (PTCs): - Each year’s credit is treated separately for transfer purposes - Year 1 credits can be transferred to Buyer A - Year 2 credits can be transferred to Buyer B - But once Year 1 credits are transferred to Buyer A, Buyer A cannot re-transfer
When property that generated an ITC is disposed of or ceases to qualify before the end of the recapture period, the credit is subject to recapture.
Recapture periods: - ITCs (Sections 48, 48E): 5 years from placed-in-service date - Each year reduces recapture liability by 20%
Recapture example: - 30% ITC claimed on $10M project = $3M credit - Project sold in Year 3 (before end of recapture period) - Recapture percentage: 60% (3 years remaining × 20% per year) - Recapture amount: $1.8M ($3M × 60%)
Who is liable when credits have been transferred?
Under Section 6418(g)(2), if a credit is subject to recapture: 1. The original eligible taxpayer (seller) is primarily liable for recapture 2. The buyer has recourse against the seller through contractual indemnification 3. The IRS will pursue the seller for repayment
This creates significant risk for sellers, who must: - Ensure project continues to qualify for full 5 years - Maintain insurance against recapture events - Provide warranties and indemnities to buyers - Consider step-up provisions in transfer agreements
Common recapture triggers: - Sale of project within 5-year period - Equipment failure or removal - Change in use (property no longer qualifying) - Loss of bonus adder eligibility (e.g., prevailing wage violation discovered) - Failure to meet production thresholds (for PTCs)
Section 6418(g)(1) imposes a 20% penalty on excessive credit transfers.
What constitutes an excessive credit? - Transferred credit exceeds the amount the seller was entitled to claim - Calculation errors in eligible basis - Ineligible costs included in basis - Bonus adders claimed without proper documentation - Credit percentage applied incorrectly
Example of excessive credit: - Seller calculates 30% ITC on $10M basis = $3M - Seller transfers $3M to buyer - IRS audit determines only $8M of eligible basis - Correct credit: $2.4M (30% × $8M) - Excessive credit: $600K ($3M - $2.4M) - Penalty: $120K ($600K × 20%) - Total liability to seller: $720K
Who pays the penalty? - The seller is liable for both the excess credit amount and the 20% penalty - The buyer may face recapture if they “knew or should have known” the credit was excessive - If buyer acted in good faith relying on seller’s representations, buyer may keep the credit
How to avoid excessive credit issues: - Obtain independent appraisals - Use qualified cost segregation studies - Get legal opinions on credit eligibility - Conservative underwriting (consider transferring 90-95% of calculated credit) - Comprehensive due diligence documentation - Insurance against calculation errors
Not all entities can purchase Section 6418 credits. The following are prohibited buyers:
1. Related Parties - As defined under Section 267(b) and Section 707(b)(1) - Includes family members, affiliated entities, and commonly controlled companies
2. Tax-Exempt Entities (with exceptions) - Entities with no tax liability generally cannot benefit - However, tax-exempt entities can purchase if they have unrelated business taxable income (UBTI)
3. Foreign Persons (in certain circumstances) - Non-resident aliens generally cannot claim U.S. tax credits - Foreign corporations with U.S. tax liability may qualify
4. Governmental Entities - Federal, state, and local governments - Governmental agencies and instrumentalities - Exception: Government-owned corporations with tax liability
5. Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) - Special rules apply; generally cannot effectively use credits
Documentation requirement: Sellers must obtain certifications from buyers confirming: - Buyer is not a related party - Buyer has sufficient U.S. tax liability - Buyer is not a prohibited transferee - Buyer understands the no re-transfer rule
The Inflation Reduction Act includes strict prohibitions on Foreign Entities of Concern (FEOC) participating in clean energy projects that claim transferable credits.
What is a FEOC? A foreign entity of concern is defined under the Infrastructure Investment and Jobs Act and includes: - Entities owned by, controlled by, or subject to the jurisdiction of China, Russia, North Korea, or Iran - Entities with 25% or more ownership/control by senior political figures from covered nations - Entities on U.S. sanctions lists
FEOC restrictions apply to: - Solar and wind projects with FEOC-manufactured components (2024 and later) - Battery storage projects with FEOC battery cells or components (2025 and later)
Consequences of FEOC involvement: - Complete loss of all transferable credits - No partial credit available - Credits cannot be claimed or transferred - Recapture of any credits already claimed
What triggers FEOC disqualification? 1. 25% Threshold: If a FEOC has 25% or more interest in: - Project company - Equipment manufacturer - Supply chain components
Due diligence requirements: - Supply chain documentation for all major components - Manufacturer country-of-origin certifications - Ownership structure verification for manufacturers - Sanctions list screening (OFAC, BIS Entity List) - Annual re-verification for multi-year credits
Best practices: - Source from U.S. or allied nation manufacturers when possible - Obtain FEOC compliance warranties from vendors - Document entire supply chain - Consider third-party FEOC verification services - Include FEOC reps and warranties in transfer agreements
Note: The IRS continues to issue guidance on FEOC compliance. Requirements may evolve, and safe harbors may be established for certain types of components.
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Contact UsThis content is for educational purposes only and does not constitute tax, legal, or financial advice. Always consult with qualified professionals before making tax credit decisions.