Direct pay and transferability for energy tax credits have been available since Jan. 1, 2023, but credit transactions using these provisions have been slow to materialize due to lack of Treasury or IRS guidance. On March 22, 2023, official Treasury Department remarks by Asst. Secretary for Tax Policy Lily Batchelder offered insights into that future guidance.
Direct Pay and Transferability Overview
Among the many new and revised tax incentives to develop clean energy projects in the Inflation Reduction Act of 2022, Congress also included new provisions allowing certain taxpayers to take advantage of the clean energy tax credits through direct pay and transferability.
- Direct pay: Federal income tax credits for renewable generation (the Section 45/45Y Production Tax Credit and the Section 48/48E Investment Tax Credit) are refundable to tax-exempt entities only, but credits related to carbon capture, clean hydrogen and manufacture of components for renewable generation facilities are refundable through direct payment at 100% of their value for both taxable and tax-exempt entities.
- Transferability: Federal income tax credits for renewable generation and 10 other credits can be monetized through transfers to a third party at a negotiated amount.
Direct pay and transferability expand the market for renewable energy projects by expanding use of these credits to entities that previously were excluded and to others that lacked the appetite for sophisticated tax planning.
Remarks on Future Program Guidance
Batchelder said direct pay and transferability guidance will be issued in spring 2023 and that Treasury and the IRS are already working on an electronic prefiling registration process for companies and organizations that want to take advantage of direct pay or transferability. A prefiling process will offer critical controls to help avoid payments going to criminal syndicates of other fraudulent actors. The program also will give the IRS access to information that will ensure companies, nonprofits, states and communities can access credits and deploy more energy projects.
Treasury and the IRS will be conducting user experience research before the full preregistration program launches. This is to help make sure the process will work for the eligible entities that Congress wants to take advantage of these provisions. One of the biggest unanswered questions is whether taxpayers using direct pay will be eligible for early filing and payments, or if they will need to wait until tax returns are filed to get their credit payments. The upcoming guidance and user experience research could provide the necessary clarity.
Applicable Code Sections
In addition to the Section 45/45Y Production Tax Credit and the Section 48/48E Investment Tax Credit, the following Code sections are also eligible for direct pay and transfers:
|Section 30C – Alternative Fuel/EV Charger Credit||Section 45V – Clean Hydrogen Production Credit|
|Section 45L – New Energy Efficient Homes Credit||Section 45Z – Clean Fuel Production Credit|
|Section 45Q – Tax Credit for Carbon Sequestration||Section 48C – Advanced Manufacturing Tax Credit|
|Section 45U – Nuclear Power Production Credit|
Taxpayers can expect useful clarification on direct pay and transferability for all of these credits before the end of 2023.