On June 14, 2023, the Department of the Treasury and the IRS released guidance on Internal Revenue Code Section 6418, which includes transferability guidance.  

• Section 48 energy investment tax credit (“ITC”)
• Section 45 renewable energy production credit (“PTC”) 
• Section 48C qualifying advanced energy project credit
• Section 48E clean electricity investment credit.
• Section 48C qualifying advanced energy project credit
• Section 48E clean electricity investment credit.
• Section 45Q carbon capture 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 30C credit for alternative fuel refueling property

Two common types of tax credits are available for businesses that purchase / own solar energy systems:

• Section 48 energy investment tax credit (“ITC”) – tax credit that reduces Federal income tax liability based on the percentage of cost basis of a solar system that in installed during the Tax Year
  • Property must be located within US / US Territory
  • Use new equipment (20% or less of overall solar system can be used)
  • Must be owned by Taxpayer claiming the credit
  • Cannot be leased to a Tax-Exempt organization (i.e. school)

• Section 45 renewable energy production credit (“PTC”) – a kilowatt-hour tax credit for electricity generated by solar technologies for the first 10 years of the solar system operation.

Solar Systems that are placed in service in 2022 or later and being construction before 2033 are eligible for a 30% ITC or a $2.75 kWh PTC if they meet prevailing wage and apprenticeship criteria or are under 1 megawatt in size.  

The credit amount may be increased for projects in an energy community or a project that meets domestic content requirements. 

Any taxpayer that is not a tax-exempt organization, a State or political subdivision, local government, and Indian tribal government, an Alaska Native Corporation, the Tennessee Valley Authority, or a U.S territory can buy eligible energy tax credits.

Corporations and individual Taxpayers are eligible to buy energy tax credits; however, individuals will be subject to passive activity limitations; however the transferability guidance does now allow individuals to a more active participant in the energy credits space.

Per the IRS, eligible taxpayers that wish to transfer tax credits may take the following steps:

• Identify qualifying project that generates the credits available for transfer
• Complete electronic pre-filing registration with the IRS through online portal
  • This will include providing information about yourself, which applicable credits you intend to earn, and each eligible project/property that will contribute to the applicable credit, among other information required. 
  • Upon completing this process, the IRS will provide you with a unique registration number for each applicable credit property. You will need to provide that registration number on your tax return as part of making the transfer election. 
    • Complete pre-filing registration in sufficient time to have a valid registration number at the time you file your tax return.
• Satisfy all eligibility requirements for the tax credit and any bonus credits for the given tax year.
  • To qualify for an energy credit related to a solar energy project, it is imperative to have the project placed in service for Tax purposes prior to becoming eligible to earn a credit.  
  • Once transfer terms are negotiated with the Buyer, plan to transfer the eligible credits to the Buyer for cash. 
  • Provide the Buyer with the unique registration number and all other information needed to claim the eligible credit. 
  • Complete the transfer election statement with the Buyer
    • An eligible taxpayer must make a transfer election by the due date (including extensions of its tax return on which the eligible credit is determined.

• Recapture Risk: Investment tax credits can be subject to recapture if the underlying asset is disposed of or taken out of service during the 5-year recapture period.  Sellers of the credit are required to give notice to the Buyers of any recapture event.  The Buyer must take the recapture into account and repay the IRS. The challenge of recapture will persist, requiring ongoing attention. Typically, developers will need to maintain the practice of indemnifying buyers against this recapture risk, with tax insurance playing a crucial role.  Credit buyers will have a vested interest in the project’s continuity throughout the 5-year recapture period.
• Eligible Cost Basis for Investment Tax Credit: One of the critical risks involves verifying that the declared basis qualifies for tax credits. The valuation of these elements demands meticulous monitoring and assessment. Typically, developers provide EPC agreement and PPA agreements, along with an appraisal and cost segregation report, as part of the Buyer’s due diligence process.
• Oversight by Developer: The developer assumes the responsibility for both the ongoing operation and maintenance of the system throughout the recapture period. It's crucial to note that a developer's declaration of bankruptcy or abandonment of a project has the potential to trigger a recapture event. One of the advantages of transferability lies in the fact that after the recapture period, the transaction with the tax credit buyer is entirely concluded.

The IRS has outlined specific requirements for determining the commencement of construction for solar energy projects eligible for the commercial solar Investment Tax Credit (ITC) under Code section 48. This guidance, referred to as "commence construction," mirrors similar guidance previously provided for the wind production tax credit.

To qualify for the Investment Tax Credit (ITC) for a solar project, there are two primary methods to establish the beginning of construction:

1. Five Percent Safe Harbor:
   • At least 5% of the final qualifying project costs must be incurred.
   • Expenses incurred should be "integral" to the process of generating electricity.
   • Equipment and services related to the project must be delivered.
2. Physical Work Test:
   • Physical work of significant nature must commence either on the project site or on project equipment at the factory.
   • The physical work conducted must be "integral" to the project.
   • Preliminary activities on the site, such as clearing, building a fence, or constructing an access road, are not considered "integral" for this purpose.

These criteria provide specific benchmarks to ensure that the project is actively progressing toward completion and is eligible for the Investment Tax Credit.  It's essential to meet the defined requirements for either the Five Percent Safe Harbor or the Physical Work Test to establish the commencement of construction for the solar project.