The Inflation Reduction Act of 2022 (the “IRA”) now allows firms to develop and sell clean energy tax credits.  Sales are officially underway.

Prospective sellers must apply online for a registration number on the new IRS portal available here.  There have been over 1,000 registrations since the IRS launched the portal on December 22.  According to the user guide, available here, sellers can only register once per tax year, but the initial registration applies for multiple transfers and can be updated to add projects.  The IRS recommends registering early—at least 120 days before filing a return—although buyers of credits may have to settle for proof that a registration was filed rather than wait for a registration number.

Tax insurance may afford an opportunity to protect buyers against potential registration and reporting risk for sales of credits.  Buyers should also be concerned about the risk of recapture tax if a project later loses its eligibility for credits or is taken out of service as a result of a casualty.  In the case of a debt-financed project with a developer that has defaulted, insurers may ask lenders to agree to a forbearance until the end of the five-year recapture period.  Similarly, tax insurance may provide comfort to prospective buyers of bonus credits given the lingering uncertainty on how some of the rules apply.

In our last update, available here, we discussed how proposed rules for the energy investment tax credit provide clarity on the types of eligible equipment.  Throughout December, the IRS was busy publishing proposed rules for several of the tax credits that are eligible for sale.

Here is the roundup:

• Clean Vehicle Tax Credit: Consumers can receive tax credits if they purchase qualifying electric vehicles, provided certain vehicle components are made in North America.  On December 1, the IRS issued proposed regulations for clean vehicle tax credits, available here, in tandem with the Department of Energy.  These rules provide clarity on “foreign entities of concern” and introduce a temporary rule for vehicles that are already on the market as manufacturers await final guidance.  The IRS also released a revenue procedure with instructions on the special reporting requirements for manufacturers of clean vehicles.
• Advanced Manufacturing Production Credit: The IRA established a new credit for developers producing critical minerals in the United States.  The IRS released proposed regulations on December 15, available here, that explain how to determine the credit.
• Aviation Fuel Credit: On December 15, the IRS released Notice 2024-6, which provides much-needed guidance for the credit for producing sustainable aviation fuel.  The Notice supplements prior guidance on how to qualify for the credit by defining the “emissions reduction percentage,” which determines whether the fuel qualifies as sustainable.  Industry leaders view the guidance as a step towards promoting innovation and the availability of more sustainable fuels.
• Clean Hydrogen Credit: The IRA established a new credit for producing clean hydrogen, a clean fuel that can be extracted by methods that generate low emissions.  Guidance released on December 22, available here, explains how to calculate the “greenhouse gas emissions reduction percentage” that effectively determines the credit amount.  Initial responses to the proposed rules have been mixed, with some praising the efforts to foster investment in new technology, and others cautioning that lax standards may allow fossil fuel developers to claim a credit they do not deserve.  That said, if the standards were more stringent, they might deter investment in clean hydrogen.

Moreover, there is a considerable demand for these tax credits.  In a December 4 press release, available here, Treasury reported that applications for the bonus credit that is available for producing clean energy in low-income communities have already exceeded more than four times the capacity.  This is a sign that there is not only enthusiasm for the potential tax savings, but that the program may also have widespread benefits.

There has been significant interest in the IRA’s program for sales of energy tax credits and we anticipate that Treasury will continue to issue guidance intended to promote a market for credits that is both energy and economically efficient.