Key Takeaways | Practical Implication of New Tax Credit Transferability Guidance

During this webinar, Partners Heather Cooper and Philip Tingle discussed the Internal Revenue Service’s (IRS) recent guidance regarding tax credit transferability under Code Section 6418. The guidance includes important rules for all potential buyers and sellers of credits.

Key takeaways included:

1. Mechanics. Only sellers will need to register via the IRS’s electronic portal prior to transferring credits. Registration must be separately completed for each credit-eligible project or facility for those credits to be transferable and must be completed prior to filing a return with the election to transfer credits under Section 6418, which must be done by both parties. Taxpayers may transfer any portion of the eligible credit, however, any adders will be transferred proportionally and cannot be carved out for transfer.
2. Credit Restrictions. Statutes that determine the available credit amount generally apply at the seller or transferor level. The at-risk rules under Section 49 and ineligibility rules under Section 50(b) apply to sellers and not buyers. However, rules that restrict a particular taxpayer from using the credits will apply to buyers. This includes the passive activity loss rules, which may prevent individuals and closely held corporations from benefitting from the credits.
3. Recapture. Buyers are generally subject to the recapture rules and any penalty risk, however, there is an exception for partnership dispositions by a seller in violation of the partnership seller rule. This means that transactions will likely require tight legal indemnities, which the guidance permits. This may also result in an increase in insurance and buyer-conducted diligence on eligibility, both of which could impact credit pricing.
4. Sales Involving Partnerships and Lessees. When credits are sold to partnerships, the partnership may allocate any purchased credits to its partners. These partners are not required to stay with the partnership for the five-year recapture period. Additionally, a partner in a joint venture may sell its allocable share of credits. However, investment tax credit pass-through lessees can’t sell credits.