Overview
The Inflation Reduction Act created a new ability for taxpayers to transfer certain tax credits to unrelated parties for cash. Section 6418 governs these transfers and provides specific rules for how the transaction is taxed for both buyers and sellers.
Key Principle: The amount paid for a transferred credit is not included in the gross income of the seller and is not deductible by the buyer.
Tax Treatment for Sellers
When you sell a transferable tax credit, the cash you receive is not included in your gross income. This is one of the most significant benefits of the transfer mechanism compared to traditional tax equity structures.
The seller must reduce the basis in the underlying property by the amount of the credit transferred. This affects depreciation deductions and gain/loss calculations on future disposition.
Scenario: Project developer has $1,000,000 in Section 48 credits
Sale: Sells credits for $900,000 cash (90 cents on the dollar)
Tax Impact:
- - $900,000 received is NOT taxable income
- - Basis in property reduced by $1,000,000
- - Net economic benefit to seller: $900,000
Tax Treatment for Buyers
The amount paid for the credit cannot be deducted as a business expense. The full face value of the credit reduces your tax liability dollar-for-dollar.
The buyer claims the full face value of the transferred credit on their tax return. The credit offsets tax liability dollar-for-dollar, just as if the buyer had earned the credit directly.
Scenario: Corporation with $2,000,000 tax liability
Purchase: Buys $1,000,000 in credits for $900,000
Tax Impact:
- - $900,000 paid is NOT deductible
- - $1,000,000 credit reduces tax liability
- - Final tax owed: $1,000,000
- - Net savings: $100,000 (10% discount)
Important Considerations
The buyer assumes the risk of credit recapture. If the underlying property does not meet requirements, the buyer may be required to repay some or all of the credit.
Both parties must complete IRS registration requirements. The seller must obtain a registration number for the credit, and transfers must be properly reported.
Credits can only be transferred once. The transfer must occur in the tax year in which the credit is determined, and the buyer claims the credit in the same year.