The Inflation Reduction Act (IRA) of 2022 introduced several measures to address climate change. It also aimed to tackle healthcare costs and other economic issues. One of the most notable provisions of the act introduces tax credits to incentivize clean energy investments.
The IRA added IRC Sec. 6418 to the Internal Revenue Code. This allows eligible taxpayers to “sell” tax credits to unrelated parties. They can do this when they are in a tax loss position or can’t fully use the credits.
Taxpayers may also be able to purchase clean energy credits. Taxpayers who purchase clean energy credits are subject to the IRS’ recently issued final regulations (T.D. 9993) supporting the final regulations under IRC 6418.
Below are things corporate taxpayers should consider when evaluating the opportunity to purchase clean energy credits:
Four benefits of purchasing IRA tax credits
- Reduction in tax liability: Purchasing IRA tax credits allows corporations to directly reduce their federal income tax liability. These credits can offset a portion of their taxes owed, thereby lowering their overall tax burden. This is particularly beneficial for corporations with significant income tax obligations.
- Discounted credits: Corporations will purchase tax credits at a discount, effectively reducing their tax costs. This can lower effective tax rates and potentially boost share prices for public companies.
- Flexibility in tax planning: By purchasing tax credits, corporations have more flexibility in their tax planning strategies. They can manage their tax liabilities more efficiently and take advantage of available credits to optimize their financial outcomes.
- Support for sustainability goals: Acquiring tax credits tied to clean energy and other sustainable projects aligns with corporate sustainability goals. It enables companies to demonstrate their commitment to environmental responsibility and sustainability. That can enhance their reputation and appeal to environmentally conscious consumers and investors.
Things to consider when purchasing credits
When purchasing IRA tax credits, taxpayers should be mindful of several factors. This helps ensure they maximize the benefits and comply with regulations.
Verification of credit validity
Ensure the tax credits are legitimate. It is important to conduct thorough due diligence to verify their authenticity and eligibility.
“At-risk” rules for passthrough entities
Sec. 6418 limits credit sales to what sellers could claim themselves. This prevents selling more credits than allowed under Sec. 49 or 50 limitations. The at-risk limitations apply with respect to the tax year in which the applicable credit is determined.
Passthrough entities will need to consider these limitations at the partner or shareholder level. This is important when calculating the allowable credit amount. The IRS may recapture and penalize credits transferred beyond the allowable amount.
Compliance with IRS guidelines
Understand and adhere to all IRS rules and guidelines related to the purchase and use of these credits. This involves staying updated on any changes in tax law or IRS interpretations that may affect the credits.
Documentation and record-keeping
Maintain comprehensive transaction records, including purchase agreements, proof of payment and any other relevant documentation. Proper record-keeping is crucial for substantiating the credits during an audit.
Market conditions and pricing
Be aware of the market conditions affecting the price of tax credits. Supply and demand, policy changes and other economic factors can cause prices to fluctuate. Aim to purchase credits at a favorable rate to maximize cost savings.
Transfer pricing
Multinational corporations (MNCs) in jurisdictions with emissions trading systems may be eligible to sell IRA tax credits. Some MNCs already have teams managing carbon credits, tracking and ESG activities.
Companies with centralized global teams should factor in transfer pricing regulations. This will help ensure arm’s length compensation of this team by relevant affiliates. Related entities can’t trade IRA tax credits, but many jurisdictions allow intragroup carbon trading.
With the rollout of Sec. 6418, MNCs should align these credits with their carbon and emission goals. They should also consider how the credits fit their overall strategy and trajectory.
Credit transferability and restrictions
Confirm that the tax credits are transferable. Additionally, understand any restrictions or limitations on their use. Some credits may have specific conditions attached, such as time frames for utilization or sector-specific restrictions.
Quality and reputation of sellers
Purchase credits from reputable sellers or intermediaries with a track record of reliability and transparency. Engaging with established and trusted parties reduces the risk of fraud or other issues.
Tax credit usage limitations
Understand the limitations on the amount of credits that you can use in a given tax year. Caps or other restrictions may limit the application of purchased credits to reduce tax liability in a specific period. These limitations affect the reduction of income tax liability in a specific period.
Legal and financial advice
Seek advice from legal and financial advisors. They can help navigate the complexities of purchasing and utilizing tax credits. Professional guidance can help ensure compliance and optimize the financial benefits.
By carefully considering these factors, corporate taxpayers can effectively manage the risks. This helps them maximize the rewards associated with purchasing IRA tax credits.
Overall, purchasing Inflation Reduction Act tax credits offers corporate taxpayers various financial, strategic and reputational benefits. This makes it an attractive option for businesses aiming to reduce tax liability and support sustainable practices.
BPM can offer introductions to buyers and sellers of IRA tax credits. We can also help sellers of IRA credits navigate these new and complex transactions. Contact us to learn more.
