A comprehensive guide to transferring tax credits under Section 6418 of the Inflation Reduction Act.
Section 6418 of the Internal Revenue Code, introduced by the Inflation Reduction Act of 2022, establishes a framework for the transferability of certain federal tax credits—primarily focused on clean energy. This mechanism enables eligible taxpayers to transfer all or a portion of specified clean energy tax credits to unrelated taxpayers for cash, rather than using the credits to offset their own federal income tax liability.
Any taxpayer subject to federal income tax, excluding tax-exempt organizations, state and local governments, Indian Tribal governments, Alaska Native Corporations, rural electric cooperatives, and the Tennessee Valley Authority. These excluded entities may instead benefit from the direct pay mechanism under Section 6417.
Made on original tax return for the year the credit is determined, by the due date (including extensions). The election is irrevocable and can only be made once per credit.
The transferee (buyer) must pay cash for the transferred credits. The payment is not includable in the transferor's gross income and is not deductible by the transferee.
A pre-filing registration process with the IRS is required before making the transfer election, ensuring compliance and tracking of credit transfers.
The transferee (buyer) is generally responsible for recapture. Final regulations clarify allocation of recapture when only part of a credit is transferred.
Partnerships and S corporations may make the transfer election for credit property they hold directly. The proceeds are treated as tax-exempt income and allocated to partners or shareholders according to their distributive share.
The IRS and Treasury finalized rules on April 25, 2024, clarifying definitions, transfer mechanics, documentation, anti-abuse provisions, and compliance requirements.
Find and pursue a project eligible for transferable tax credits.
Complete all requirements to earn the eligible credit (e.g., place the project in service).
Complete the electronic pre-filing registration and obtain a registration number for each credit property.
Arrange the transfer to an unrelated party for cash.
Provide the transferee with the registration number and required documentation.
Complete and sign a transfer election statement with the transferee.
File a timely tax return with the transfer election statement and all required attachments.
The transferee must also file a timely return with the statement to claim the credit.
Proper documentation is critical for successful tax credit transfers. Both the transferor and transferee must maintain comprehensive records to substantiate the credit's validity and the transfer's compliance with regulations.
The transferor must provide the transferee with "required minimum documentation" validating the credit's existence and eligibility.
Documents proving the credit's qualifications and statutory compliance
Evidence supporting claims for increased credit rates
Documentation of eligible costs or production activities
Evidence of compliance with requirements like prevailing wage and apprenticeship
This documentation serves as protection for the transferee in case of IRS audit or examination, providing evidence of the credit's validity and proper transfer procedures.
Timing is critical for tax credit transfers. Careful planning is essential to meet all deadlines and properly execute the transfer.
Original Tax Return Only
The transfer election must be made on the original tax return for the year the credit is determined
No Amended Returns
Elections cannot be made on amended returns
Pre-Filing Registration First
Pre-filing registration with the IRS must be completed before making the transfer election
Both Parties Must File
Both parties must include the transfer election statement on their respective timely filed returns
Planning ahead is essential to ensure all deadlines are met and the transfer is properly executed. Missing any timing requirement could invalidate the transfer.
This guide is for informational purposes only. For the most up-to-date and detailed information, always refer to official IRS guidance and consult with a qualified tax professional.