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Final Rules on Energy Tax Credit Sales Confirm All Systems Go

The Inflation Reduction Act of 2022 (the “IRA”) now allows firms to develop and sell clean energy tax credits.  In our last update, available here, we discussed how the emerging market for tax insurance may provide comfort to prospective buyers of credits.

On April 25, Treasury and the IRS released the final regulations on the IRA’s transferability provisions for sales of tax credits, generally reaffirming the rules as proposed in June 2023, which we discussed here.  While Treasury rejected suggestions in the comments that would have broadened the market for credits (and improved developers’ margins), by finalizing the existing rules, Treasury is endorsing what is already proving to be an efficient market.

Many were hoping the final regulations would articulate circumstances in which purchased credits may be treated as arising from non-passive activity to broaden the potential pool of buyers of credits.  The final 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.  In addition, the final regulations confirm that sales of credits are required to be “paid in cash” on an annual basis, rejecting comments suggesting that “advanced commitments” include advance payments under a single transfer agreement to facilitate forward sales of production tax credits.

With several billion dollars in energy tax credit sales in 2023, it seems that a robust market is well underway within the confines of the existing rules.  The biggest open questions relate to the “direct payment” election that allows tax-exempt and government entities to receive a cash refund from the IRS.  Although partnerships are generally ineligible for direct pay, recent guidance (available here) describes the process by which jointly operated projects may elect out of partnership status, allowing tax-exempt entities to join with taxable investors for their capital and expertise.  Comments to the proposed rules indicate a pressing need for examples of potentially workable tax structures.  In addition, Treasury and the IRS have requested comments on whether tax-exempt entities may be able to receive direct payment for purchased credits.  The comment period will end on December 1, 2024.

Other updates on energy tax credits include:

  • New Round of Credit Allocations: Taxpayers must apply for the qualifying advanced energy project credit.  In the first round of the program, Treasury allocated approximately $4 billion of credits to applicants.  On April 29, Treasury announced a new round of $6 billion of credit allocations in Notice 2024-36, bringing the total amount of credit allocations to $10 billion.
  • Aviation Fuel Credit: On April 30, Treasury and the IRS released Notice 2024-37, which incorporates the Greenhouse gases, Regulated Emissions, and Energy use in Technologies (“GREET”) model to calculate the emissions reduction percentage to determine whether the fuel qualifies as sustainable.
  • Clean Vehicle Tax Credits: On May 3, Treasury released final regulations, available here, outlining the procedure for consumers to receive tax credits for purchasing electric vehicles and selling them back to the dealer to receive a rebate that reduces the upfront cost of the vehicle.  To qualify for the credits, certain vehicle components must be made in North America.  The final regulations introduce new reporting standards to clarify these rules.
  • Bonus Credits: On May 16, Treasury released Notice 2024-41 to provide more clarity on the IRA’s domestic content bonus tax credit.  The notice expands the list of applicable projects to include hydropower and notably addresses a key concern: suppliers’ reluctance to disclose highly sensitive data about their production costs.  The rule provides a safe harbor allocation of production costs for each component of an applicable project, which could prove especially valuable for developers that cannot obtain this information from their suppliers.

More guidance may be released in the coming weeks as Treasury hastens to finalize IRA guidance ahead of a potential change in administration.

Key Contacts

Adam Blakemore
Partner
T. +44 (0) 20 7170 8697
adam.blakemore@cwt.com

Linda Z. Swartz
Partner
T. +1 212 504 6062
linda.swartz@cwt.com

Jon Brose
Partner
T. +1 212 504 6376
jon.brose@cwt.com

Andrew Carlon
Partner
T. +1 212 504 6378
andrew.carlon@cwt.com

Mark P. Howe
Partner
T. +1 202 862 2236
mark.howe@cwt.com

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