Inflation Reduction Act Final Rules for Tax Credit Transferability
The Biden-Harris Administration is seeking to expand access to clean energy tax credits through the Inflation Reduction Act. On April 25, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released final rules on a key provision called “transferability,” a key component of the Inflation Reduction Act, which already aims to expand and advance clean energy in the United States. Transferability allows businesses to unlock the benefits of tax credits even if they don’t have enough tax liability to use them directly.
What is transferability?
The final rules to the Inflation Reduction Act created two credit delivery mechanisms – elective pay (or direct pay) and transferability. Elective pay allows companies to receive a direct cash payment from the government for the value of the credit. Transferability, however, allows companies to sell their tax credits to third-party entities with higher tax burdens. This provides businesses with immediate tax-free funds to invest in clean energy projects, accelerating their development and reducing costs. This is particularly beneficial for businesses that lack the tax liability to fully utilize the credits themselves. Previously, such businesses were unable to reap the full financial rewards of clean energy investments.
What are the benefits of transferability?
Aside from providing tax and financial benefits through clean energy investments, transferability can foster the following benefits:
- Faster, more affordable clean energy projects: Businesses can access upfront capital to invest in clean energy projects, accelerating the transition to clean power.
- Job creation and lower energy costs: Increased investment in clean energy leads to more jobs in the sector and potentially lower energy bills for consumers.
- Expanded participation: Previously disadvantaged entities like state and local governments, not-for-profit organizations and many businesses can now benefit from clean energy tax credits.
Solar and Wind Project Transferability or Direct Payment
According to the Treasury, over 900 entities have already requested registration numbers for projects across all 50 states plus territories as of April 19. Nearly all (97 percent) are pursuing transferability, primarily for solar and wind projects. Also, over 1,300 projects are seeking direct payment, including clean buses and vehicles from state and local governments.
How Does the Inflation Reduction Act Affect Business Taxes?
For questions or more information about how transferability and the Inflation Reduction Act can impact your organization’s tax situation, contact your Windham Brannon advisor today, or reach out to Nicole Suk.
