When Can Tax Credits Be Transferred by Businesses?

 Posted on June 26,2024 in Small Business Taxes

In recent years, the tax laws in the United States have been updated to provide benefits for businesses that invest in clean energy or utilize environmentally friendly vehicles and equipment. Tax credits have been made available for these businesses, and the laws also allow these credits to be transferred between different taxpayers. Understanding when these transfers may be used and the procedures that must be followed when doing so can be a complex matter. To ensure that these issues will be handled correctly, businesses can work with an attorney who has a strong understanding of the applicable tax laws.

Transferring Tax Credits in Return for Cash Payments

The Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPs) ACT created a number of different tax credits, and these laws also provided taxpayers with the ability to transfer credits from one entity to another. The IRS has issued regulations detailing the credits that are eligible for transfer and the rules for how they may be transferred. These rules go into effect on July 1, 2024.

Credits that can be transferred include:

• Clean Electricity Investment Credit

• Clean Electricity Production Credit

• Clean Fuel Production Credit

• Clean Hydrogen Production Credit

• Renewable Energy Production Credit

• Qualified Advanced Energy Project Credit

• Zero-emission Nuclear Power Production Credit

• Carbon Oxide Sequestration Credit

• Advanced Manufacturing Production Credit

• Alternative Fuel Vehicle Refueling/Recharging Property Credit

Most taxpayers will be eligible to transfer these credits to other taxpayers. Non-eligible taxpayers include tax-exempt organizations and state or local government organizations. A taxpayer who is eligible may transfer tax credits to unrelated taxpayers in exchange for cash payments. These payments will not be included in a taxpayer’s gross income, and they are not tax-deductible for the transferee.

To transfer eligible tax credits, taxpayers will need to follow certain procedures:

1. Meet the requirements to earn tax credits: An eligible taxpayer will need to demonstrate that they have placed clean energy projects into production or satisfied other requirements to be eligible for tax credits. These requirements must be met in the taxable year during which the credit will be claimed.

2. Register with the IRS: An eligible taxpayer must create an account in the IRS’s Energy Credits Online (ECO) portal and complete a pre-filing registration, providing information about the qualifying project. The taxpayer will then receive a registration number.

3. Arrange for the transfer of tax credits: After reaching an agreement to transfer a tax credit to an unrelated party in exchange for cash, the taxpayer will provide the transferee with the registration number and any documentation required to claim the credit.

4. Complete a transfer election statement: The eligible taxpayer and the transferee will create a statement that will include the name, address, and taxpayer identification number of both parties; a description of the credit that is being transferred, including the amount of the credit; the amount of cash paid in exchange for the credit; and the registration number.

5. File tax returns: When submitting tax returns for the taxable year in which the credit is claimed, both the eligible taxpayer and the transferee must include the transfer election statement, the registration number, and any other required information.

6. Renew registrations: If an eligible taxpayer plans to transfer tax credits in subsequent tax years, they will need to complete a pre-filing registration, receive a registration number, and complete the same steps when transferring credits and filing tax returns.

Contact Our San Jose, CA Tax Law Attorney

While tax credits related to clean energy can be very beneficial for businesses that invest in these areas, understanding how they may be used and when they may be transferred can be a complex matter. At John D. Teter Law Offices, our San Jose business tax lawyer can provide guidance on the best steps taxpayers can take to minimize their tax burdens and address other related legal concerns. Contact us at 408-866-1810 and set up a consultation.