mai 08 2024

Final Regulations Issued on Direct-Pay Elections and Transfer of Tax Credits


On April 25, 2024, the US Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations (T.D. 9993) (the “final regulations under section 6418”) concerning the election to transfer certain tax credits under section 6418 of the Internal Revenue Code (the “Code”).1 This follows the recent issuance on March 6, 2024, of final regulations (T.D. 9988) (the “final regulations under section 6417”) concerning the direct pay of certain tax credits under section 6417 of the Code. 

The final regulations provide guidance on the two options for monetizing clean energy tax credits enacted in the Inflation Reduction Act of 2022 (“IRA”). The first option is the transfer of tax credits under section 6418, which allows certain eligible taxpayers to choose to transfer all or a portion of eligible credits to unrelated taxpayers for cash payments beginning after December 31, 2022. The transferees 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 second option is the direct-pay election under section 6417, which allows applicable entities to apply for direct payments with respect to certain applicable energy credits beginning after December 31, 2022. There are a total of 12 clean energy tax credits eligible for section 6417 direct pay, including section 45 renewable electricity production and section 48 investment tax credits as well as tax credits for electric vehicles and charging stations. Notably, the statute allows tax-exempt entities, which traditionally could not fully benefit from clean energy tax credits, to take advantage of these incentives.

Previously, Treasury and the IRS had released proposed regulations under section 6417 (REG-101607-23) (the “proposed regulations under section 6417”) for direct-pay elections and under section 6418 (REG-101610-23) (the “proposed regulations under section 6418”) for the transfer of applicable credits, as well as temporary regulations (T.D. 9975) for the mandatory IRS pre-filing registration process. The final regulations generally adopt the proposed regulations, with some modifications, and remove the temporary regulations. 

Taxpayers hoping for meaningful substantive revisions to the proposed regulations under section 6417 and the proposed regulations under Section 6418 may be disappointed as the final regulations generally follow the proposed regulations. For example, the final regulations under section 6417 continue to provide that entities or arrangements classified as partnerships for US federal income tax purposes are not applicable entities eligible to make the direct-pay election, notwithstanding the request of a number of commenters to provide rules allowing partnerships to be “looked through” for purposes of making a direct-pay election. 

Notably the final regulations under section 6418 declined to provide that the passive credit rules under section 469 should not apply to transferee taxpayers or that the rules should apply only in limited circumstances, notwithstanding that the application of such rules effectively prevents most individuals from being able to be viable transferees. The final regulations under Section 6418 also did not revisit the imposition of the risk of recapture on transferees in circumstances other than direct or indirect transfers of an interest in a partnership transferor, notwithstanding Treasury and the IRS receiving many comments recommending that recapture consequences be borne by the transferor. In addition, and as discussed in more detail below, the final regulations did not adopt provisions permitting bonus tax credits to be transferred separately from the underlying base tax credits. Notwithstanding the foregoing, the final regulations did make some changes from the proposed regulations, including clarifications around recapture events and the treatment of transfers on superseding and amended returns.

Section 6418 Final Regulations 

Definition of “Eligible Taxpayer”

Section 6418(f)(2) defines an “eligible taxpayer” as any taxpayer that is not an applicable entity described in section 6417(d)(1)(A) (i.e., a tax-exempt entity eligible to make a direct-pay election). Proposed Treasury Regulation section 1.6418-1(b) clarified that this includes any taxpayer under section 7701(a)(14) that is any entity subject to any internal revenue tax, other than those described in section 6417(d)(1)(A) and Treasury Regulation section 1.6417-1(c). 

A commenter sought clarification that a partnership partially owned by section 6417(d)(1)(A) entities can still qualify as an eligible taxpayer for purposes of section 6418. Treasury and the IRS agreed, as long as the partnership has not made a direct pay election for the section 45Q credit for carbon oxide sequestration, the 45V for clean hydrogen production, or the 45X credits for advanced manufacturing of renewable energy systems. Under section 6417, a partnership can only be an applicable entity for those credits if it makes an elective payment election. Further, Section 7701(a)(14) defines “taxpayer” to include partnerships, and so one without an applicable entity election can qualify as an eligible taxpayer.

The same commenter requested clarification that such a partnership can transfer the entire eligible credit for a property or facility it directly holds without reduction for applicable entity partners, subject to limits under section 50(b)(3) and (4). Treasury and the IRS agreed, noting those provisions may limit eligible investment tax credits for tax-exempt or government partners.

Transfer Elections Involving the Section 45Q Credit

Multiple commenters advocated for modifying the proposed regulations to allow a taxpayer that is allowed a section 45Q credit due to an election under section 45Q(f)(3)(B) to allow a “disposer” or “utilizer” of qualified carbon oxide to make a transfer election for that credit. However, Treasury and the IRS clarified that a taxpayer allowed a section 45Q credit due to a section 45Q(f)(3)(B) election is not the taxpayer with respect to which the credit is determined. Under section 45Q and its regulations, the credit is attributable to the person owning the carbon capture equipment and ensuring the capture and disposal, utilization, or use of the qualified carbon oxide. Merely conducting carbon capture activities is insufficient. The language in Proposed Treasury Regulation section 1.6418-2(d)(1) regarding conducting activities only applies where ownership is not required, which is not the case for the section 45Q credit. The final regulations clarify in Treasury Regulation section 1.6418-2(d)(1) that section 45X is the only eligible credit not requiring ownership by the transferor.

Procedure and Due Date of Making a Transfer Election
Procedure of Making a Valid Transfer Election

Proposed Treasury Regulation section 1.6418-2(b)(3) provided rules for making a valid transfer election. The final regulations adopt the proposed rule for making a valid transfer election without substantive change but clarify that the registration number received during the required pre-filing registration related to the eligible credit property must be included on the relevant credit source form.

Due Date for Making a Transfer Election

Section 6418(e)(1) requires a transfer election to be made by the due date (including extensions) of the return for the year the credit is determined but no earlier than 180 days after the enactment of such section. The final regulations in Treasury Regulation section 1.6418-2(b)(4) permit making or revising an election on a superseding return but not an amended return or an administrative adjustment request under section 6227 of the Code (“AAR”). The final regulations clarify that an election cannot be made for the first time or withdrawn on an amended return or AAR but a numerical error in a properly claimed election can be corrected on an amended return or AAR. The final regulations also allow an automatic six-month extension under Treasury Regulation section 301.9100-2(b) to make the statutory election but only for taxpayers filing a timely original return without an extension. Notably, the final regulations do not mandate a requirement for the transferor to report or notify the transferee taxpayer in the event of an adjustment pursuant to an AAR or amended tax return.

Date Transfer Election Is Considered To Occur

The final regulations clarify that a transfer does not technically occur until the eligible taxpayer satisfies all requirements in Treasury Regulation section 1.6418-2(b) for a valid election. However, they noted that this technical transfer date does not necessarily control for all purposes under section 6418. For example, the paid in cash rule allows amounts to be paid for the transferred credit portion as early as the beginning of the taxable year in which the credit is determined even if this precedes the technical transfer date.

Anti-Abuse Provisions 

Section 6418(h) authorizes the Secretary to issue regulations or other guidance that may be necessary to carry out the purposes of section 6418. To prevent transactions contrary to the purposes of section 6418, the proposed regulations included an anti-abuse provision in Proposed Treasury Regulation section 1.6418-2(e)(4). The final regulations adopt the proposed anti-abuse provision with certain revisions, including replacing the “average transfer price of the eligible credit between unrelated parties” with the more administrable “arm’s length price” standard. Treasury and the IRS believe it is premature to adopt safe harbors or additional examples now but will continue studying transactions to determine if appropriate.

Transferee Taxpayer’s Treatment of Eligible Credit

Taxable Year

Commenters requested clarification on whether taxpayers with 52-53 week taxable years can rely on Treasury Regulation section 1.441-2(c)(1) to treat a year ending on the last Saturday in December as ending on December 31. The final regulations provide that in determining the year to account for a credit under section 6418(d) and Treasury Regulation § 1.6418-2(f)(1)(i), a 52-53 week year of an eligible or transferee taxpayer is deemed to end on the last day of the calendar month nearest to the 52-53 week year’s last day. This aligns the eligible and transferee taxpayers’ year-ends in the commenters’ fact patterns, avoiding a delay to the following year for the transferee to account for the credit.

Estimated Tax Payments

The preamble to the proposed regulations explained that a transferee taxpayer could account for a purchased or intended-to-be-purchased credit in calculating estimated tax payments but remains liable for any underpayment additions to tax under sections 6654 and 6655.

In response to comments, Treasury and the IRS clarified that, because section 6418 generally contemplates a transferee stepping into the eligible taxpayer’s shoes, a transferee can account for the credit in determining quarterly estimated tax liability no earlier than the eligible taxpayer could. If section 6418(d) and Treasury Regulation section 1.6418-2(f)(1) require the transferee to account for the credit in a future year, the transferee cannot consider it for estimated tax liability until that later year begins.

For example, if a calendar year eligible taxpayer agrees in 2024 to transfer a credit determined that year to a calendar year transferee, and a timely, complete transfer election is made, the transferee can account for the credit in calculating its 2024 required annual payment and quarterly estimated tax installments. The credit cannot be treated as an estimated tax payment. If the ultimately transferred credit under section 6418(a) is later adjusted below the 2024 agreed amount, the transferee may be liable for sections 6654 or 6655 additions to tax.

Elections for Transferor Partnerships and Transferor S Corporations

Consistent with modifications to Proposed Treasury Regulation section 1.6418-2(b)(4), the final regulations modify Proposed Treasury Regulation section 1.6418-3(d)(2) to provide late-election relief for transferor partnerships and S corporations and permit partnerships and S corporations to correct numerical errors in a properly claimed transfer election on an amended return or AAR.

Excessive Credit Transfers

Proposed Treasury Regulation section 1.6418-5(a)(3) would have provided a rule that any payments made by a transferee taxpayer to an eligible taxpayer that directly relate to an excessive credit transfer (as defined in Proposed Treasury Regulation section 1.6418-5(b)) are not subject to section 6418(b)(2) or Proposed Treasury Regulation section 1.6418-2(e).

The final regulations revise the proposed rules to clarify the tax consequences to a transferee taxpayer with respect to payments made to an eligible taxpayer that directly relate to an excessive credit transfer. The final regulations provide that any such payment is not subject to the rules that exclude credit transfer payments from the transferee taxpayer’s deductions. This change allows a transferee taxpayer to deduct the portion of the consideration paid to the eligible taxpayer for a specified credit portion that relates to an excessive credit transfer.

The final regulations also clarify that the amount of a payment that directly relates to an excessive credit transfer is equal to the total consideration paid in cash by the transferee taxpayer for its specified credit portion multiplied by the ratio of the amount of the excessive credit transferred to the transferee taxpayer to the amount of the transferred specified credit portion claimed by the transferee taxpayer. However, the timing and character of any deduction, as well as the impact of insurance or indemnity payments, are determined under general income tax principles and are beyond the scope of the final regulations.

Lastly, the final regulations provide additional clarification to the examples illustrating cases of no excessive credit transfer, an excessive credit transfer, and an excessive credit transfer with multiple transferees. These clarifications are consistent with the modifications made to the rules on payments related to excessive credit transfers.


A commenter requested clarification as to the allocation of recapture liability between an eligible taxpayer and a transferee taxpayer to the extent the eligible taxpayer retains any eligible credits and whether there is an ordering rule applied similar to an excessive credit transfer. The final regulations clarify that, except in certain cases involving dispositions by partners or S corporation shareholders, recapture liability applies proportionately to any transferee taxpayers and an eligible taxpayer to the extent an eligible taxpayer has retained eligible credits. The final regulations also add formulas for determining the recapture amount and clarify the effect of a partner or S corporation shareholder recapture event on remaining recapture liability.

Duplicate Recapture and Additional Guidance

Treasury and the IRS addressed comments urging mitigation of duplicate recapture of the same investment tax credit (“ITC”). The final regulations clarify that, to the extent a partner in a transferor partnership or a shareholder in a transferor S corporation recognizes a tax increase under sections 50(a) or 49(b) that does not result in recapture liability to a transferee taxpayer, that amount reduces the remaining ITC subject to recapture for an event caused directly by the transferor partnership or S corporation.

Despite requests for additional guidance and examples on recapture rules, including events under Treasury Regulation sections 1.6418-5(e) and 1.45Q-5, Treasury and the IRS decided not to provide further general guidance or examples based on the explanations in the preamble to the proposed regulations and the Summary of Comments and Explanation of Revisions of the preamble to the final regulations. However, the final regulations clarify that for section 45Q credits, recapture liability applies proportionately to an eligible taxpayer and any transferee taxpayers to the extent an eligible taxpayer has retained any amount of the credit determined with respect to a component of carbon capture equipment owned by the eligible taxpayer within a single process train.

Credit Carry Forward

The proposed regulations provided special rules regarding the carryback and carryforward of transferred specified credit portions. Under Proposed Treasury Regulation section 1.6418-5(g), a transferee taxpayer would have been able to apply the three-year carryback period under section 39(a)(4) for unused current year business credits to a specified credit portion, to the extent the credit portion is described in section 6417(b) (taking into account placed in service requirements). The preamble clarified that (1) credits listed in section 6417(b) are applicable credits, and (2) no statutory language prohibits a transferee from using the carryback rule for an eligible credit.

In response to commenters’ requests, the final regulations confirm that a transferee taxpayer can carry forward unused credit amounts. The final regulations revise Proposed Treasury Regulations 1.6418-5(g) (redesignated as Treasury Regulation section 1.6418-5(h)) to refer to both the carryback and carryforward periods when describing the application of section 39(a)(4).


The final regulations under section 6418 provide helpful guidance requested by several commentators with respect to the transfer of tax credits under section 6418 by real estate investment trusts (“REITs”). The final regulations clarify that tax credits that have not yet been transferred are disregarded for purposes of the REIT asset test. They also clarify that cash received is not included in a REIT transferor’s gross income so the transfer is not itself a REIT prohibited transaction tax. Additionally, the final regulations provide that the transfer is not a sale of property for purposes of the REIT prohibited transactions rules and, thus, does not count as one of the seven sales described in prohibited transaction safe harbor rules.

Section 6417 Final Regulations

Definition of “Applicable Entity”

Section 6417(d) provides that an applicable entity includes (1) any tax-exempt organization, (2) any state or political subdivision thereof, (3) the Tennessee Valley Authority, (4) any Indian tribal government, (5) any Alaska Native Corporation, and (6) any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas. In addition, there are “electing taxpayers,” which are taxpayers other than applicable entities under section 6417(d) that elect to take advantage of section 6417 for section 45V clean hydrogen credit, section 45Q carbon oxide sequestration credit, or section 45X advanced manufacturing production credit.

The statutory language created some uncertainty as to the scope of entities that fall under the umbrella of “applicable entity” for purposes of section 6417. To provide clarification, the proposed regulations provided that “any organization exempt from the tax” includes all organizations exempt from tax under section 501(a). Proposed Treasury Regulation section 1.6417-1(c)(7) also clarified that “applicable entity” includes an agency or instrumentality of (1) any US territory or a political subdivision thereof; (2) any state, the District of Columbia, or political subdivision thereof; and (3) an Indian tribal government or a subdivision thereof. The final regulations retained this broad interpretation of “applicable entities” to cover all organizations exempt from tax under section 501(a) and secondary-level entities, which state and local governments often act through with respect to investments. However, the final regulations reiterate that federal agencies and instrumentalities are not applicable entities for the purpose of section 6417. In addition, entities that qualify as nonprofits under state law but do not have federal tax-exempt status are not covered and thus may not make direct pay elections.

In addition, the proposed regulations stipulated that partnerships and S corporations are not applicable entities described in section 6417(d)(1)(A), regardless of whether their partners or shareholders are applicable entities. The final regulations retained this view that partnerships or S corporations are not allowed to make elective payment elections except with respect to the section 45V, section 45Q, and section 45X credits. 

However, with the final regulations, Treasury and the IRS issued a separate Notice of Proposed Rulemaking (REG-101552-24) that is intended to provide further clarity and flexibility for applicable entities that co-own clean energy projects and would like to utilize elective pay. The proposed regulations under section 761 intend to provide pathways for owners of an applicable entity to access elective pay for credits earned through a joint ownership arrangement, including validly “electing out” of partnership tax treatment.2 The proposed rules would permit a full or partial election out of partnership treatment if the following requirements are satisfied: (1) the unincorporated organization must be owned, in part or in full, by one or more applicable entities; (2) the members of the organization must enter into a joint operating agreement with respect to the applicable credit property in which they reserve the right to take in kind or dispose of their pro rata shares of the electricity produced, extracted, or used or any associated renewable energy credit or similar credits; (3) pursuant to the joint operating agreement, the organization must be organized exclusively to jointly produce electricity from its applicable credit property and with respect to which one or more of certain applicable credits is determined; and (4) one or more members that is an applicable entity must make an elective payment election under section 6417(a) for the applicable credits determined with respect to its share of the applicable credit property. 

Procedural Rules for Making Elective Payment Elections

Proposed Treasury Regulation section 1.6417-2 provided general rules for an applicable entity or electing taxpayer to make an elective payment election under section 6417. The final regulations adopt the rules as proposed, with some modifications. The following describes some highlights of the modifications.

Original Return Requirements

The original return requirements in Proposed Treasury Regulation section 1.6417-2(b)(1)(ii) provided that an elective payment election must be made on the original return, not revised on an amended return, with no relief available under Treasury Regulation sections 301.9100-1 through 301.9100-3. Commenters requested the option to make the election on an amended return, an extension for late elections, and relief for good-faith errors, especially for new entrants. In response, the final regulations clarify that a numerical error with respect to a valid election made on an original return can be corrected on an amended return or an administrative adjustment request. An automatic six-month extension under Treasury Regulation section 301.9100-2(b) is allowed but only for taxpayers filing on time. 

Pre-filing Registration Requirements

Proposed Treasury Regulation section 1.6417-2(b)(2) provided that pre-filing registration is a prerequisite for treating any amount as a payment made by an applicable entity under section 6417(a). The rule required a valid registration number for each applicable credit property to be provided on Form 3800 attached to the tax return. In addition to reiterating the requirements, the final regulations clarify that a valid registration number must also be included on any necessary completed source credit form(s) related to the applicable credit property.

Due Date Requirements 

The proposed regulations specified due dates for applicable entities, particularly those for which no income tax return is required under sections 6011 or 6033(a) of the Code, such as governmental entities. In order to allow flexibility for entities, the final regulations simplified the deadline provision by removing specific references to Code sections and allow applicable entities not required to file a federal income tax to choose their taxable year based on a calendar or fiscal year provided that such entity maintains adequate book and records to support making an elective payment election on the basis of its chosen taxable year.

No Excess Benefit Rule 

The proposed regulations included a no excess benefit rule which provided that the total credit amount shall be reduced if the sum of “restricted tax exempt amounts” and the applicable credit exceeded the cost of credit property. The final regulations provide clarifications with respect to the no excess benefit rule, including that the determination of a tax-exempt grant’s purpose is made at the grant award and that grants awarded post-acquisition are generally not restricted tax-exempt amounts. In addition, the final regulations address concerns about the timing of credit reduction, applicability to loans, and potential tax credit recapture if a loan is later forgiven. The rules make it clear that only forgivable loans are considered tax-exempt amounts for the rule.

Double Benefit Rule 

The proposed regulations included an ordering rule that required the taxpayer to first compute its federal income tax liability and allowed amount of section 38 credits (general business credits (“GBC”)) for the tax year, including any carryforwards. The taxpayer would apply its section 38 credits against its current year tax liability and reduce its direct pay amount by any amount of excess or unused current-year section 38 credit. 

Multiple commenters requested revisions or exclusion of the section 38 ordering rule and argued that an applicable entity might lose the benefit of treating the section 6417 applicable credit as a payment if it used prior year credit carryforwards and current year applicable credits to reach the section 38(c) limitation. This could result in carrying otherwise usable non-applicable GBC back or forward to other taxable years. 

To address these concerns, the final regulations make modifications, including changing the ordering of steps and the calculation of the net elective payment amount. The net elective payment amount is now the lesser of the aggregate of all section 6417 applicable credits or the total GBC (including applicable credits) over the total GBC allowed against tax liability (determined with regard to section 38(c)). 

Chaining of Credits

The proposed regulations provided that no direct pay election can be made with respect to a credit purchased pursuant to section 6418. Noting that allowing chaining could result in administrative challenges and potential for abuse, the final regulations adopted the same view that applicable entities that purchase credits under section 6418 cannot make a direct pay election. However, the IRS also issued Notice 2024-27, requesting further input on situations in which a direct pay election could be justified for a credit transferred under section 6418. The notice states that Treasury and the IRS “recognize that a robust market for transferred, credits (credit transfer market) that helps support a broad array of projects and investment is consistent with Congress’s intent in enacting the IRA.”


The final regulations under sections 6417 and 6418 provide much-needed guidance on the direct pay and transfer election options for clean energy tax credits under the IRA. The regulations clarify key definitions, procedural requirements, and tax consequences for taxpayers seeking to monetize these credits. While generally adopting the proposed rules, the final regulations make several clarifications that provide greater flexibility on amended return filings, deadline extensions, and corrections of certain errors. Although some comments were not adopted due to statutory constraints or administrative complexities, the final regulations represent a significant step forward in implementation of the IRA and the facilitation of a robust credit market.



1 Unless otherwise specified, all “section” or “§” references are to the Internal Revenue Code of 1986, as amended (Code) or the Income Tax Regulations (26 CFR part 1).

2 The press release U.S. Department of Treasury, U.S. Department of the Treasury, IRS Release Final Rules on Provisions to Expand Reach of Clean Energy Tax Credits Through President Biden’s Investing in America Agenda (Mar. 5, 2024). 

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