The Internal Revenue Service (“IRS”) announced on December 22, 2023 that the pre-filing registration tool is now open for taxpayers to register to claim the elective payment or transfer eligible tax credits.
The Inflation Reduction Act created the opportunity for eligible taxpayers to monetize certain manufacturing, clean energy, and production tax credits through the process of elective payment or the ability to transfer the credit to a third-party taxpayer.
Elective payment permits applicable entities – generally, entities that are not subject to federal income tax, such as tax-exempt entities, state or local governments, the Tennessee Valley Authority, Indian Tribal Governments, Alaska Native Corporations, and cooperatives furnishing electric energy to rural areas – to treat the amount of eligible credits earned as making a payment against tax for the amount of the credit, which can then be refunded to the taxpayer.
Eligible entities – essentially, any entity not eligible for elective payment – may elect to transfer all, or a portion, of an eligible credit to a third-party for a cash payment. The transferor receives the cash payment for the credit; the transferee obtains the value of the acquired credit and may use this credit to offset federal tax liabilities.
The Internal Revenue Code and Treasury Regulations state that in order to make elective payment or to transfer the credit, taxpayers must first register with the IRS.
The registration tool is active through the following link: Register for elective payment or transfer of credits | Internal Revenue Service (irs.gov).
The IRS has also provided step-by-step guidance through Publication 5884: Publication 5884 (irs.gov). This states that registration should occur after placing the eligible property or facility in service, but no earlier than the beginning of the tax period when the credit is earned. Registration should also be completed at least 120 days prior to the due date of the tax return in which the credit is reported to allow time for the IRS to review and the taxpayer to respond, should the IRS have any questions or requests for additional information prior to issuing the registration number to the taxpayer.
The 2023 tax year will be the first for taxpayers to take advantage of this new opportunity to monetize federal income tax credits. Documentation and support is imperative, including documenting the placed in service dates, the employees and wages and benefits when the prevailing wage and apprenticeship requirements must be met, and documentation to support eligibility of applicable bonuses such as energy communities and domestic content.
Validation of, and due diligence around, credits is highly recommended for buyers and sellers of credits, particularly since risk is then transferred to the acquirer.
Please contact your Mazars professional for additional information.
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.