Departments publish final regulations on credit transfers

The Treasury Department and the IRS recently issued final regulations regarding the portability of certain loans to implement the Inflation Reduction Act (IRA) portability provisions that go into effect on July 1, 2024. Additionally, on May 16, 2024, the IRS published Notice 2024-2041, in which provides additional guidance on the national content requirement for premium amounts.

Background: IRA tax benefits for the renewable energy industry

As discussed in Pierce Atwood’s alert, the IRA gave the renewable energy industry some welcome news. The IRA has significantly changed the energy tax credit regime, including an extension and extension of the Section 48 Investment Tax Credit (ITC) and the Section 45 Production Tax Credit (PTC), which also include a 10% bonus amount for projects meeting the requirements for national content and other specified conditions. The ITC and PTC apply to projects starting construction before January 1, 2025.

To cash in these tax breaks and certain other tax benefits, an IRA allows taxpayers to roll over their tax breaks into cash.

Final provisions on transferability

1. HOW TO QUALIFY

Under the regulations, certain qualified taxpayers may transfer some or all of their qualified credits to unrelated taxpayers (the acquiring taxpayer). The acquiring taxpayer must pay the relief in cash, which cannot be included in the qualifying taxpayer’s gross income or deducted to the benefit of the acquiring taxpayer.

A. Eligible taxpayer

The transferring taxpayer must be an ‘eligible taxpayer’, which is essentially any taxpayer who is not a tax-exempt entity subject to the direct payments rules. If a partnership has a partner who is exempt from tax, the regulations still qualify the partnership as a qualified taxpayer. However, Section 50(b)(3) may limit the amount of the tax-exempt partner’s credit if the partner uses qualifying property that is not used primarily in an unrelated trade or business.

B. Eligible Loans

The regulations qualify most IRA tax deductions under Sections 45 and 48 as “qualified deductions” for carryover.

C. A specific portion of the loan

In determining the portion of credits that may be rolled over, the IRS has taken a “vertical” rather than “horizontal” view. The Final Regulations do not allow the amount of the bonus tax credit to be separated from the amount of the base tax credit. Taxpayers must therefore contribute all or a percentage of the entire loan amount.

D. Paid in cash

All transfers “require payment in cash,” which includes “cash, check, cashier’s check, money order, wire transfer, automatic clearing house (ACH) transfer, or other bank transfer with funds immediately available.”

However, what is most significant about the ‘cash payment’ requirement is that cash payments on credits cannot be made before the year the credit is generated and no later than the transfer application deadline.

The IRS has taken the position that allowing prepaid payments would raise legal and administrative issues, such as whether there was an over-transfer of the credit or whether the eligible taxpayer had gross income if eligible prepaid credits were not transferred in a later year. The IRS has clarified that there is no prohibition against an acquiring taxpayer lending funds to a qualified taxpayer, including loans secured by a qualifying loan purchase and sale agreement.

2. HOW TO TRANSFER A LOAN

A. No additional transfers

The Final Regulations also extended the issue of the one-time transfer limitation. Although qualifying loans can only be transferred once, IRS regulations are intended to close the door on any secondary markets. Specifically, the IRS stated that if “there are broker-dealers or other taxpayers providing liquidity, it is worth noting that any payments received by these taxpayers in connection with qualifying loans will be subject to tax…”

B. Making transfer choices

Taxpayers must also elect to carry forward any qualifying credits using Form 3468. The form must be filed with the original or replacement tax return (including any extensions). However, a carryover election cannot be made based on an amended return, but the IRS has clarified that amended returns can be used to correct numerical errors.

C. Transfer Election Statements

Additionally, as part of the transfer election process, both the qualifying taxpayer and the acquiring taxpayer must attach a “transfer election statement” to their returns. A declaration of election to transfer is a written document describing the transfer of a specific part of the loan between the eligible taxpayer and the acquiring taxpayer. The declaration of election to transfer may be any document (e.g. purchase and sale agreement, etc.) that contains basic information regarding the transfer, such as parties, type of loan, loan registration number, amount transferred, etc.

Guidance on new national content requirements

The IRS also published new guidance on domestic content requirements for ITCs and PTCs. As discussed in a previous Pierce Atwood alert, if an eligible project meets applicable salary and seniority requirements, it may earn an additional bonus of 10% ITC or PTC if it meets domestic content requirements. Designed to encourage American manufacturing, domestic content requirements are met when both Demand for steel or iron and Requirements for finished products are fulfilled.

Prior to the release of the new guidance, there was confusion in calculating the adjusted percentage and domestic cost percentage rules to meet the requirements Requirements for finished products. Taxpayers were forced to collect cost data from multiple suppliers and manufacturers, which created challenges for justification and verification. The guidance provides taxpayers with a new safe harbor to address these challenges. New planned safe haven

The new elective safe harbor provides a predetermined percentage of costs for various Eligible Projects and applicable project components. Projects involving photovoltaic systems, onshore wind farms and battery energy storage systems are eligible for election to the new safe harbor. For example, the Guide provides the following related cost percentages for solar PV installations:

APC	MPC	Ground installation (tracking)	Ground installation (fixed)	Roof (MLPE)	Roof (string)
Photovoltaic module	Cells	36.9	49.2	21.5	30.8
	Frame/handrail	5.3	7.0	3.1	4.4
	Front glass	3.7	4.9	2.2	3.1
	Encapsulating	2.2	3.0	1.3	1.8
	Back sheet/rear window	3.7	4.9	2.1	3.1
	Junction box	1.6	2.2	1.0	1.4
	Edge seals	0.2	0.2	0.1	0.2
	Pottants	0.2	0.2	0.1	0.2
	Glues	0.2	0.2	0.1	0.2
	Buss ribbons	0.4	0.5	0.2	0.3
	Bypass diodes	0.4	0.5	0.2	0.3
	Production	11.5	15.3	6.7	9.6
Inverter	Printed circuit board assemblies	3.0	4.0	16.0	2.5
	Electrical parts	1.0	1.3	1.6	1.1
	Climate control	0.7	0.9	–	0.3
	Attachment	1.0	1.3	1.6	0.8
	Production	3.3	4.4	16.4	2.9
Photovoltaics tracking or non-steel Roof Excruciating	Torque tube	9.7	–	–	–
	Fasteners	0.4	–	11.1	16.0
	Rotary drive	2.0	–	–	–
	Shock absorbers	0.4	–	–	–
	Engine	3.1	–	–	–
	Controller	0.9	–	–	–
	Rails	2.0	–	8.6	12.3
	Production	6.2	–	6.1	8.7
	Total	100	100	100	100