IRS guidance on new clean energy credits includes transferring to unrelated parties

The Inflation Reduction Act of 2022 established several new or modified clean energy tax credits. The IRS recently issued new proposed regulations, temporary mandatory pre-filing registration, and FAQs that provide additional guidance on the rules for who can take advantage of the new clean energy credits.  

What are the new clean energy credit rules? 

The new proposed regulations break down elective payment elections and clean energy credit transfers to an unrelated taxpayer. 

Elective payment election 

The new rule allows applicable entities to treat certain credits as a payment against their federal income tax liabilities rather than as a nonrefundable credit. This means that the credits will first be used to offset the entity's tax liability, and any excess will be refunded. 

The applicable entities that can make an elective payment election include: 

• Tax-exempt organizations 
• State and local governments 
• Indian tribal governments 
• Alaska Native Corporations 
• The Tennessee Valley Authority 
• Rural electric cooperatives 

All other taxpayers may elect to be treated as an applicable entity for a limited number of credits. 

To make an elective payment election, the applicable entity must file Form 8834, "Credit for Certain Clean Energy Property."  

The form must be filed by the due date of the entity's federal income tax return for the tax year in which the credits were earned. 

Transfer of Credits 

The new rules also allow eligible taxpayers to elect to transfer all or a portion of an eligible credit to unrelated taxpayers for cash payments. The unrelated taxpayers are then allowed to claim the transferred credits on their tax return. 

The eligible taxpayers that can transfer credits include:

• Taxpayers that are not applicable entities 
• Taxpayers that are applicable entities, but that have exceeded their annual limitation for elective payment elections 

To make an election to transfer credits, the eligible taxpayer must file Form 8835, "Transfer of Clean Energy Credits." 

The form must be filed by the due date of the eligible taxpayer's federal income tax return for the tax year in which the credits were earned. 

Temporary mandatory pre-filing registration process put in place 

The IRS has also issued temporary regulations that provide rules for a mandatory pre-filing registration process. The registration process is designed to ensure that the IRS has accurate information about taxpayers who are claiming clean energy credits and to help prevent fraud, waste, and abuse. 

The clean energy credit pre-filing registration process must be completed through an electronic portal, and a registration number received, prior to making an elective payment election or an election to transfer eligible credits. 

The process also applies prior to making an elective payment election related to advanced manufacturing investment credit amounts under the CHIPS Act of 2022.

FAQs 

The IRS has also issued a number of FAQs that provide additional guidance on the new rules. Of the multiple listed, the questions of most relevance to tax pros include: 

• What are the requirements for making an elective payment election?
• What are the requirements for transferring credits to unrelated parties? 
• What is the mandatory pre-filing registration process? 
• When do the new rules go into effect? 

Key takeaways 

The new proposed regulations and FAQs provide much-needed guidance on the rules for the new and modified clean energy credits. These rules will help tax pros and taxpayers to better understand their options and make informed decisions about how to claim these credits. 

Tax pros should consult with their clients to discuss the new rules and to determine how they will affect their businesses. They should also ensure that their clients are aware of the new registration requirements and that they comply with these requirements.