tax credits for business

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We are still waiting for guidance to clarify rules about direct sales of federal tax credits, but there will be new rules which allow the owners of the  tax credits to sell the credits to others in the open market.  Word on the street is that these credits are trading for $0.80 to $0.95 cents on the dollar and the buyer of the credits will require indemnification from the seller that the tax credit is valid (there are insurance products available for this).  

• The Inflation Reduction Act authorizes owners of solar projects to sell credits to others for cash, provided the credits originated in 2023 or later (Section 6418 of the US tax code).
• The deadline to sell a tax credit is the year-end in which the seller becomes entitled to a tax credit or until the due date of tax returns for that year.  For example, if your solar project is built in 2024, you could sell the credit until March 15, 2025 or whatever your due date is.
• Sales proceeds from tax credits are NOT reported as income to the seller.
• We are still waiting for guidance to see if buyers would pick up the difference between the amount paid and the value of the tax credit as income.
• Tax credits can only be sold once, must be paid for in cash, cannot be carried from another year, and cannot be sold to a related party.
• Sellers might need to buy insurance to backstop indemnities in the event that a tax credit is disallowed.
• The IRA allows non-profits and other certain entities that directly own projects to apply to the IRS for direct cash payments.
• Several points of clarification are expected from the Treasury, including whether tax credits transferred to another company can be sold, how to handle potential income from tax credit profits, and who is responsible for audit adjustments after tax credits have been sold.

Here is a link to a great article about tax credit transferability from a leading law firm in the renewable energy space.