Is It Possible to Sell Tax Credits for Cash?
Published on by Mary Benintendi in Manufacturing, Tax Services
The answer might surprise you. Because in some cases, it’s yes.
The IRS has released final regulations outlining the rules and definitions for how taxpayers can transfer eligible tax credits to other unrelated taxpayers based on provisions of the Inflation Reduction Act.
Which tax credits qualify for transfer?
In short – energy credits (at least, some are eligible). Here are the energy credits that qualify for transfer:
- 30C alternative fuel refueling property credit
- 45(a) renewable electricity production credit
- 45Q carbon oxide sequestration credit
- 45U zero-emission nuclear power production credit
- 45V clean hydrogen production credit
- 45X credit for advanced manufacturing production
- 45Y clean electricity production credit
- 45Z clean fuel production credit
- 48 energy credit
- 48C qualifying advanced energy project credit
- 48E clean electricity investment credit
For additional details, see our previous post on the Section 45X tax credit.
What are the rules?
Starting with the 2023 tax year, eligible taxpayers can transfer these credits to unrelated taxpayers in exchange for cash. An eligible taxpayer is defined as:
- A taxpayer who owns the underlying eligible credit property and conducts the activities giving rise to the credit, except in the case of Sec. 45X. Sec. 45X states that a taxpayer only needs to conduct the Section 45X activity.
- A taxpayer can be a grantor who owns any portion of a trust. The taxpayer may transfer eligible credits with respect to eligible credit property held directly by the portion of the trust the taxpayer is treated as owning.
How does it work?
A pre-filing registration must be completed through an IRS electronic portal prior to the transfer of credits. This election must be made in connection with a filed tax return for credits to transfer from one taxpayer to another.
Once the credits are transferred for cash, the bonus for the transferor is that the cash they receive for transferring their eligible tax credits will not be included in their gross income. At the same time the expense for the transferee will be considered non-deductible. However, the transferee will be able to then claim the tax credit on their return.
Let’s talk.
If you’re looking for new ways to build your manufacturing company, create new smart strategies to help your business thrive, or minimize your tax burden, the Barnes Dennig team of top manufacturing pros is here to help. Contact us for a free consultation.
