Clifford Chance

Proposed Treasury Regulations Issued On Direct Pay And Transferability Elections For Tax Credits

June 22, 2023

The enactment of the Inflation Reduction Act on August 16, 2022, significantly changed the landscape of renewable energy tax credit monetization and tax equity finance in the United States. The IRA introduced two mechanisms that have enhanced taxpayers' ability to monetize tax credits effective for taxable years beginning on or after January 1, 2023. First, certain tax-exempt entities can elect to treat certain tax credits as a tax payment, which effectively allows these entities to receive a tax refund from the United States Treasury even if they otherwise do not have sufficient tax liability to use the credits (the "direct pay election"). Second, certain eligible taxpayers can elect to sell some or all of their eligible tax credits for cash consideration, generally to buyers that have sufficient tax liability to avail themselves of the credits (the "transferability election").

The Treasury and the Internal Revenue Service were tasked with the implementation of these rules and published Notice 2022-50 in October 2022 to request feedback from stakeholders on potential issues that may require administrative guidance. On June 14, 2023, based on the feedback from comment letters received in the fall of 2022, the Treasury and the IRS released temporary regulations and proposed regulations implementing the direct pay election and the transferability election. The regulations largely address technical points related to the implementation of the direct pay election and the transferability election, which we have not reproduced here.  Rather, the discussion below focuses on surprises and key takeaways from these regulatory packages, with additional briefings on other topics to follow.

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