How Section 6418 Is Reducing Out-of-Pocket Taxes

Section 6418, enacted as part of the Inflation Reduction Act, establishes a framework for the transferability of certain clean energy and advanced manufacturing credits. It allows taxpayers who generate credits but are unable to utilize them the opportunity to monetize the credits fully.

Taxpayers may monetize through the sale of the credit to unrelated taxpayers in exchange for cash. Importantly, the One Bill Beautiful Bill (OBBB) does not eliminate or provide early phaseouts for Section 6418. Instead, the OBBB provides many early phase-outs to the energy credit provisions, making Section 6418 inapplicable after those dates.

Eligibility

First, to elect to transfer a credit, the taxpayer generating the credit must be an “eligible taxpayer.” An eligible taxpayer (seller) is any taxpayer that is not an applicable taxpayer under Section 6417(d)(1)(A).

A seller cannot be:

• A tax-exempt organization
• Government
• Indian tribal government
• Alaska Native Corporation
• Tennessee Valley Authority
• Rural electric cooperative
• Similar entity

This means most for-profit businesses and individuals are eligible to use Section 6418 to sell a credit, but government and tax-exempt entities are not.

Second, a credit may be transferred only if it is an eligible credit.

Eligible credits include:

• Section 30C: Alternative fuel vehicle refueling property credit
• Section 45: Renewable electricity production credit
• Section 45Q: Carbon oxide sequestration credit
• Section 45U: Zero-emission nuclear power production credit
• Section 45V: Clean hydrogen production credit
• Section 45X: Advanced manufacturing production credit
• Section 45Y: Clean electricity production credit
• Section 45Z: Clean fuel production credit
• Section 48: Energy credit (investment tax credit)
• Section 48C: Qualifying advanced energy project credit
• Section 48E: Clean electricity investment credit
• Section 40A: Biodiesel fuels credit (but only to the extent that it refers to the small agri-biodiesel producer credit)

How to Transfer the Credits

The transfer can only be transferred to an unrelated taxpayer (transferee taxpayer or buyer). Further, the sale is required to be paid in cash only.

A seller may sell all or a portion of an eligible credit. Further, the seller may sell portions of the eligible credit to multiple unrelated parties in the same tax year, provided the total transferred does not exceed the total credit generated by the eligible credit facility.

If a credit includes bonus amounts, such as domestic content, energy communities, and prevailing wage, the bonus amount may not be transferred separately. Rather, the transferred portion must include a pro rata share of each applicable bonus.

The cash received is not included in the gross income of the seller. Although the buyer is treated as the taxpayer for the purposes of the credit, the buyer may not deduct the amount paid and may not claim depreciation on the underlying credit property. The buyer and the seller must file a transfer election in the tax year when the credit is determined.

Treasury guidance confirmed that upon transfer, all credits become passive for the buyer, regardless of the treatment by the seller. Generally, the passive activity rules will limit buyers to C corporations and taxpayers with passive income.

Before making the transfer, the seller must complete an electronic pre-filing registration with the IRS for each eligible credit. The registration number must be included on both the seller’s and buyer’s tax returns. The registration must be completed before the election is made on the tax return, and it is valid only for the tax year for which it is obtained.

Making the Transfer

The transfer election is executed on the original, timely-filed tax return (including extensions) for the year the credit is determined. Both parties to the transfer must complete and attach the applicable tax forms and a transfer election statement (as provided in the regulations) to their returns.

The transfer election is irrevocable and cannot be made or revised on an amended return. Once a credit, or portion thereof, is transferred, it cannot be transferred again by the seller. Transfers of credits relating to progress expenditures and transfers to specified foreign entities are prohibited.

Penalties and Recapture

Upon transfer, the risk of IRS audit and disallowance of the credit is transferred to the buyer. Further, if the IRS determines that the amount of credit claimed by the buyer exceeds the amount that would otherwise be properly allowed, the buyer’s tax is increased by the excess amount plus a 20 percent penalty, unless reasonable cause can be shown.

Generally, the most important factor in determining reasonable cause is the extent of the buyer's efforts to determine that the amount of the specified credit portion transferred by the seller is not more than the amount of the eligible credit determined with respect to the eligible credit property.

If a recapture event occurs, such as the property being disposed of, the buyer is responsible for the tax consequences. The seller is required to notify the buyer of the recapture event as outlined in the regulations.

How Eide Bailly Can Help

The transfer process is nuanced and complicated. Eide Bailly can guide taxpayers through the transfer process by reviewing and evaluating eligible credits and supporting documentation, assisting in compliance with reporting requirements, and providing ongoing support and advice. Learn more.