IRS releases final guidance on transfers of certain credits under the Inflation Reduction Act

The Department of Treasury and Internal Revenue Service issued final regulations today describing rules and definitions for the transfer of eligible credits in a taxable year, including specific rules for partnerships and S corporations.

The Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors act (CHIPs) enable taxpayers to take advantage of certain manufacturing investment, clean energy investment and production tax credits through elective pay or transfer provisions.

For tax years beginning after Dec. 31, 2022, eligible taxpayers can choose to transfer all or a portion of eligible credits to unrelated taxpayers for cash payments.

The unrelated taxpayers are then allowed to claim the transferred credits on their tax returns. The cash payments are not included in gross income of the eligible taxpayers and are not deductible by the unrelated taxpayers.

The final regulations also describe special rules related to excessive credit transfers and recapture events, including rules for determining whether an event has occurred, the resulting tax impact and the person responsible for that tax impact.

The final regulations also provide rules for a mandatory IRS pre-filing registration process through an electronic portal. The pre-filing registration process must be completed, and a registration number received, prior to making an election to transfer eligible credits.

In addition, the final regulations describe specific rules for partnerships and S corporations as eligible taxpayers and transferee taxpayers.

Previously, the IRS issued proposed regulations for the transfer of applicable credits and temporary regulations for the mandatory IRS pre-filing registration process.

For detailed instructions on how to use the tool, refer to Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 Pre-Filing Registration ToolPDF.

Source: IRS-2024-120, April 25, 2024