Are Solar Tax Credits Transferable in 2024?

by Eric Lam - Published 12/13/2023

As we delve deeper into the era of renewable energy, understanding the nuances of solar tax credits becomes increasingly important for homeowners and businesses. A recent development from the Internal Revenue Service (IRS) has introduced a significant change in the handling of certain clean energy credits, including those for solar power. Here's what you need to know about the transferability of these credits based on the latest IRS update.

ITC IRS Update: June 14, 2023

On June 14, 2023, the IRS issued proposed regulations and FAQs under IR-2023-116, heralding a transformative shift in how certain clean energy credits are managed. This update, applicable for tax years beginning after December 31, 2022, introduces two key provisions:

Elective Payment Election for Applicable Entities: Entities like tax-exempt organizations, state and local governments, Indian tribal governments, and similar entities can now elect to treat certain credits as payments against federal income tax liabilities. This option allows for the credit amount to offset any tax liability first, with any excess becoming refundable.
Credit Transfer to Unrelated Taxpayers: Eligible taxpayers, typically those not classified as applicable entities, now have the option to transfer all or a portion of eligible credits to unrelated taxpayers in exchange for cash payments. These transferred credits can then be claimed on the tax return of the unrelated taxpayers.

Impact on Solar Tax Credits

These new regulations introduce a level of flexibility previously unseen in the realm of solar tax credits. Specifically, they open doors for broader utilization and transferability of these credits, making solar energy investments more accessible and financially viable for a wider range of entities and individuals.

Considerations for Solar Investors

Expanded Opportunities: This change could potentially expand opportunities for entities and individuals to benefit from solar tax credits, even if they do not have sufficient tax liability to utilize the full credit amount themselves.
Elective Payment Election: Entities that traditionally couldn't benefit from these credits due to their tax-exempt status can now elect to receive them as refundable payments.
Transferability of Credits: The ability to transfer credits to unrelated parties for cash payments adds a new dimension to the financial planning around solar investments. It allows for a more dynamic market where solar credits can be exchanged, providing liquidity and flexibility.
Registration Requirement: To make an elective payment election or transfer credits, entities and individuals must complete a mandatory pre-filing registration process through an IRS electronic portal and obtain a registration number.
Consultation is Key: Given the complexity and the novelty of these regulations, consulting with tax professionals or solar energy consultants remains crucial to navigate these changes effectively.

Transferability Rules

Overview of Section 6418

Section 6418(a) of the Code allows eligible taxpayers to elect to transfer all or a specified portion of certain eligible credits to unrelated transferee taxpayers. Once this election is made, the transferee, rather than the original taxpayer, is treated as the taxpayer for the purposes of these credits. The conditions for such transfers include:

Transfer of Credits: The transfer must be of all or part of an eligible credit for any taxable year.
Consideration for Transfer: Any consideration paid by the transferee to the eligible taxpayer must be in cash.
Tax Treatment of Consideration: The cash consideration is not included in the gross income of the eligible taxpayer and is not deductible for the transferee under any part of the Code.

Eligible Credits

Section 30C Credit: Credit for alternative fuel vehicle refueling property.
Section 45 Credit: Renewable electricity production credit.
Section 45Q Credit: Credit for carbon oxide sequestration.
Section 45U Credit: Zero-emission nuclear power production credit.
Section 45V Credit: Clean hydrogen production credit.
Section 45X Credit: Advanced manufacturing production credit.
Section 45Y Credit: Clean electricity production credit.
Section 45Z Credit: Clean fuel production credit.
Section 48 Credit: Energy credit.
Section 48C Credit: Qualifying advanced energy project credit.
Section 48E Credit: Clean electricity investment credit.

These provisions establish a framework for the transferability of specific energy-related tax credits, allowing for greater flexibility and potential financial benefit for both the transferor and transferee.

Navigating the Complexities of Section 6418 Credit Monetization

The introduction of Section 6418 in the realm of clean energy tax credits brings with it a novel approach to credit monetization. This regime, as detailed in the proposed regulations, offers taxpayers the opportunity to harness the full potential of these credits.

However, it's crucial to understand the administrative responsibilities and costs that come along with this opportunity.

Understanding Administrative Costs

Taxpayers opting for transferability under Section 6418 must prepare for certain administrative costs. These costs stem from the need to thoroughly understand the rules, coupled with the obligations of recordkeeping and reporting. This entails comprehending the nuances of the pre-filing registration process and the requirements for tax return submissions.

The extent of these costs will vary significantly. Factors influencing the costs include the size of the taxpayer entity and the nature of the project(s) they are involved in.

Smaller entities or those engaged in less complex projects may find the administrative burden relatively lighter compared to larger organizations or those involved in more intricate projects.

The Pre-Filing Registration Process

A critical step in taking advantage of Section 6418's transferability is the pre-filing registration process. This process involves several key actions:

Registration of Intent: Taxpayers must register their intent to make a transfer election. This is a declaration of their plan to transfer eligible credits.
Listing of Credits and Properties: During registration, taxpayers need to list all eligible credits they intend to transfer. Additionally, they must specify each eligible credit property contributing to the determination of these credits.
Obtaining a Registration Number: Completing this process is necessary to receive a unique registration number for each eligible credit property. This number is crucial for the subsequent transfer of the eligible credit.

Transfer Election Statement

Upon filing their tax return, taxpayers must adhere to two main requirements to make a valid transfer election:

Transfer Election Statement: This document is pivotal for the process. It describes the specifics of the credit portion transfer between the eligible taxpayer and the transferee taxpayer. This statement must be completed and attached to the return.
Documentation Requirements: The eligible taxpayer is obliged to provide certain minimum documentation to the transferee taxpayer, who must retain this documentation as long as it remains relevant.

Compliance with General Business Credit Requirements

It's important to note that many of the requirements for Section 6418, such as completing the relevant source credit form and Form 3800, are standard for any taxpayer claiming a general business credit.

Therefore, while there are additional steps for those transferring credits under Section 6418, some aspects of compliance overlap with general credit claims.

The Burden of Compliance

The Treasury Department and the IRS acknowledge the increased burden of compliance that comes with these new regulations. While they don't have precise data on the extent of increased costs, they have outlined the estimated burden in the Paperwork Reduction Act section of the preamble. This section offers a more detailed view of what taxpayers can expect in terms of record keeping and reporting responsibilities.

The introduction of the Section 6418 credit monetization regime offers new avenues for maximizing the benefits of clean energy tax credits.

However, it also brings additional layers of administrative and compliance responsibilities. As such, taxpayers considering this route should be prepared for the associated costs and requirements, and may find it beneficial to seek expert advice to navigate these complexities effectively.

Conclusion

The IRS's recent update marks a significant shift in the landscape of solar tax credits, introducing a level of transferability and flexibility that can potentially make solar investments more attractive and accessible. As the regulations around solar tax credits evolve, staying informed and seeking professional advice will be crucial for homeowners, businesses, and other entities looking to maximize the benefits of their solar energy investments.

Solar ITC FAQ

Q1: What is the latest IRS update on clean energy credits? A1: On June 14, 2023, the IRS issued new regulations (IR-2023-116) introducing two major changes for clean energy credits, applicable from tax years after December 31, 2022. This includes an elective payment election for certain entities and the option for eligible taxpayers to transfer credits to unrelated taxpayers.

Q2: How does the elective payment election work? A2: Tax-exempt organizations, government entities, and similar bodies can now elect to treat certain clean energy credits as payments against federal income tax liabilities. Any excess credit becomes refundable, enhancing the financial viability of solar investments for these entities.

Q3: Can clean energy credits be transferred to other taxpayers? A3: Yes, eligible taxpayers who aren't applicable entities can transfer all or part of their eligible credits to unrelated taxpayers in exchange for cash. The transferee can then claim these credits on their tax return, offering greater flexibility in the use of these credits.

Q4: What are the administrative requirements for transferring credits under Section 6418? A4: Taxpayers must complete a pre-filing registration process, listing all eligible credits and credit properties they intend to transfer. They must also attach a transfer election statement to their tax return and provide necessary documentation to the transferee.

Q5: What should taxpayers be aware of regarding these new regulations? A5: The new regulations increase flexibility but also add administrative and compliance responsibilities, such as recordkeeping and reporting. Taxpayers should be prepared for these additional requirements and consider seeking expert advice to navigate the process effectively.