On June 21, 2023, the IRS issued proposed regulations for Internal Revenue Code (“IRC”) Sections 6417 and 6418, which relate to an election for direct payments of certain energy-related credits and transferability of certain energy credits, respectively. Furthermore, the IRS released FAQs regarding elective pay and transferability on June 14, 2023. IRC Sections 6417 and 6418 were recently added to the IRC as part of the Inflation Reduction Act that was passed in 2022. Both IRC Sections 6417 and 6418 are effective for tax years after 2022. The proposed regulations may be relied upon for tax years beginning after December 31, 2022. Below is a general summary of the new IRC Sections 6417 and 6418.
IRC § 6417: Elective Payment of Applicable Credits
IRC Section 6417 allows Applicable Entities (defined below) to elect to treat certain energy-related credits as direct payments against tax due for the tax year for which the credit was determined. Direct payments essentially treat tax credits as if they were taxes paid on a return. Applicable Entities generally include certain entities exempt from federal tax under subtitle A, state or local governments, the Tennessee Valley Authority, Indian tribal governments or an Alaska Native Corporation. Although partnerships are not Applicable Entities for purposes of direct payments, IRC Section 6417 contains exceptions for specific credits (such as the credit for carbon oxide sequestration under IRC Section 45Q) that expand the types of taxpayers eligible to make an election for that credit. IRC Section 6417 also contains procedural requirements for making a direct pay election such as a mandatory pre-filing registration. The proposed regulations provide more clarity on the nuances for partnerships and S corporations. The direct pay election is not available for credits that have been transferred. In the event of an “excess payment” (when the credit received via direct pay exceeds the allowable amount), a 20% penalty would be applied.
IRC § 6418: Transfer of Certain Credits
IRC Section 6418 provides an easier way for taxpayers that are not Applicable Entities to transfer all or a portion of certain federal energy-related tax credits. Previously, taxpayers would create partnerships or leasing structures with other taxpayers to utilize the tax credits. All of the eligible credits that can be transferred are energy-related. Credits must be transferred to unrelated taxpayers. However, Applicable Entities under IRC Section 6417 cannot transfer eligible credits. Consideration paid by a transferee for an eligible credit must be paid in cash. The amount paid is not deductible by the transferee. Furthermore, consideration received is not includible in the eligible taxpayer’s gross income. Elections to transfer credits must be made by the due date (including extensions) of the tax return for the year the credit was determined, but in no event earlier than February 5, 2023. Credits must be taken into account in the first taxable year of the transferee that ends with or after the taxable year that the credit was originally determined for the eligible taxpayer. Once an election is made to transfer an eligible credit, it generally cannot be revoked. In the event of an “excessive credit transfer” (similar to an “excess payment” of a direct payment), a 20% penalty would be applied.
As a reminder, the IRS has issued only proposed regulations. Comments are due by August 14, 2023.
If you have questions surrounding any tax related matters, please reach out to Maggie Simonson Schild, or one of our other Taxation Attorneys.
This article was written for general informational purposes and summarizes tax laws. As such, it should not be relied upon for compliance with the Internal Revenue Code or state tax laws.
