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Treasury's Recycling Bin Overflows with Comments to Their Proposed Rules on Energy Tax Credit Transfers

On June 14, 2023, the IRS requested comments on their proposed regulations on the transferability provisions created under the Inflation Reduction Act of 2022 (the “IRA”) that allow developers to sell clean energy tax credits.

We introduced the proposed regulations here and discussed a few notable issues that some comments raised here.  All of the comments received to date are posted here

On August 23, 2023, the IRS conducted a public hearing where members of the clean energy sector and tax practitioners presented their comments.

By and large, the prevailing sentiment gleaned from the public is the need for efficient tax policy to encourage participation in this new market for sales of energy tax credits, ultimately to promote investment in clean energy.

Here are some suggestions put forward to accomplish this objective:

  • Simplify the Pre-Filing Registration Process: Many suggested that requiring only one registration number per taxpayer or project would alleviate compliance burdens, as there are no more opportunities for fraud than those in traditional tax equity, which does not require registration. One comment advised that more reliable sellers—for example, sellers that are publicly-traded—could be excused from repeated registrations.  Other requests include the ability to correct mistakes made during registration. 
  • Need for Specific Examples: Many requested specific examples on how to apply credits toward quarterly payments for estimated taxes as well as how to calculate excessive credit transfers. 
  • Allocate Recapture Risk to Sellers of Credits: If a project later loses its eligibility for credits as a result of, among other things, the sale of the investment credit property during the applicable recapture period, then the buyer of any credits bears the risk of any recapture tax.  While a seller would not be barred from indemnifying a buyer for such risk, some maintain that the risk should more appropriately be directly borne by sellers of credits because they control whether a recapture event occurs. Otherwise, smaller businesses may be deterred from buying credits.
  • Allow Separate Transfers of Bonus Credits: A developer may sell a “portion” of a credit, but may not sell a bonus credit separately from its base credit.  Some have argued that allowing bonus credits to transfer separately is crucial to establishing a robust market for sales of energy tax credits.
  • Clarify that Buyers Can Make Advance Payments: Credits must be sold for cash, but some comments requested confirmation that “advanced commitments” under the proposed regulations may include advance payments under a single transfer agreement.  Practitioners anticipate that many energy tax credit projects will be financed by advance payments.
  • Reconsider the Application of the Passive Activity Rules: The majority of the comments referenced the application of the passive activity rules.  Many urged the IRS to articulate circumstances in which purchased credits may be treated as arising from non-passive activity—or to remove the restrictions entirely—in order to broaden the potential pool of buyers of credits.  Currently, the proposed regulations confirm that unless a buyer of credits “materially participates” in the seller’s business, purchased credits will only offset passive income of buyers subject to the passive activity rules.  This makes it difficult for small energy projects to attract buyers, as individuals will be unlikely to purchase these credits.
  • Allow Lessees to Sell Credits: A taxpayer allowed to claim a credit only as a result of an election by a third party (e.g., as a lessee of the project) is not permitted to sell the credits.  Comments from members of the carbon sequestration industry pointed out that this rule effectively bars many firms that are directly engaged in carbon recapture from selling these credits because such firms can only claim the credits when project owners make specific elections.

We eagerly await answers to these questions in the forthcoming final regulations.

Key Contacts

Linda Z. Swartz
T. +1 212 504 6062


Adam Blakemore
T. +44 (0) 20 7170 8697

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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