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Takeaways From IRS Public Hearing on Clean Energy Tax Credit Transfer Rules
The procedural process for final tax credit transfer rules continues to march along at a refreshingly speedy pace. On August 23, 2023, the IRS and Treasury Department hosted a public hearing during which a series of individuals provided commentary and recommendations for the proposed transfer rules issued in June 2023.
This hearing took place in the wake of the comment letter deadline of August 14, 2023. Now that these two opportunities for public input on the proposed transfer rules have passed, the “open” period of the regulation process is complete. This means the IRS and Treasury Department are now permitted, from a procedural perspective, to issue final rules at any time without further public input.
We at Ever.green remain optimistic for a near-term finalization of the rules, as finalization is viewed as the last step in the process necessary to fully unlock the tax credit transfer marketplace. Though we hope the final rules are issued sooner than later, late-October/early-November seems likely.
Even where things stand today with the absence of final rules, Ever.green believes the IRS and Treasury Department have laid down sufficient guidance so far that tax credit buyers and sellers should feel comfortable proceeding with transactions in reliance on the proposed rules (so long as taxpayers follow the proposed rules “in their entirety and in a consistent manner”).
Below is a summary of three topics covered in the hearing as well as our view on an additional open question which was not fully addressed in the proposed rules or in the public hearing.
Topic #1: Vertical v. Horizontal Slice of a Tax Credit
The proposed rules require that each tax credit buyer take a so-called vertical slice of a tax credit. This means that the credit adders, such as energy community or domestic content, may not be hived off and separately sold or retained. Rather, each purchaser buys an undivided interest in each portion of a credit.
One speaker advocated for the IRS and Treasury to give sellers the ability to bifurcate a credit into so-called horizontal slices, meaning the base credit, for example, could be sold separately from the domestic content adder portion of the credit.
Ever.green view - We recognize the appeal of optionality as it relates to what “slice” of a credit is transferred. Even so, our marketplace has developed and is developing around the vertical slice approach proscribed in the proposed rules and we do not see the absence of a horizontal slice approach as a limiting factor to the demand for tax credits.
Topic #2 - Individuals and Passive Income Requirement
The proposed rules took an approach to the treatment of transferable tax credits that effectively forecloses individuals from purchasing tax credits unless they have “passive income” to offset with the credit.
For this purpose, passive income takes the definition provided in the Internal Revenue Code. At the risk of oversimplification, and putting aside a grip of exceptions and nuances, passive income for individuals can be thought of as an individual’s share of “active income” from an activity in which such individual does not materially participate. Passive income generally does not include “classic” passive income such as dividends or interest.
Watch Ever.green’s blog for a demystification of the passive income requirement, coming soon.
Multiple speakers advocated for the IRS and Treasury Department to change course on this issue so that individuals could purchase a credit and apply it against non-passive income (e.g., W-2 wages).
Ever.green view - Though our current business model is built on the expectation of limited participation by individuals, Ever.green would welcome an increase to the tax credit buyer population if these restrictions on individuals were to be removed from the final rules. However, we do recognize the potential downsides of such an approach. Industry participants would be well-advised, in such a case, to adopt procedures and policies around diligence and disclosure to ensure that individual participants in the tax credit marketplace, who may be less sophisticated than current participants, are adequately protected from and informed about risks.
Topic #3 - Tax Credit Registration Timing
Another speaker provided some observations relating to the to-be-unveiled registration process for tax credit sales. Very generally, the proposed rules require tax credit sellers to acquire a registration number for each tax credit sold.
This speaker noted that the IRS ought to set clear expectations on the duration of the registration process once an application is submitted.
Ever.green view - Early access to registration numbers could be very helpful in creating certainty around whether an identified tax credit is transactable, even though the proposed rules only require registration numbers to be available by the time tax returns are filed for the year in which the sale took place (e.g., a tax credit sold in September 2023 would not require a registration number until the tax return filing deadline for the buyer and seller, generally September 15, 2024 for corporate taxpayers on extension).
Bonus Topic - Tax Credit Acquisition Funds
None of the speakers brought up the question around whether a group of taxpayers could set up a partnership, or fund, with the sole intent that the partnership would acquire tax credits and allocate them to the fund members.
Whether such a fund structure would survive IRS scrutiny is an unanswered question in the proposed rules, though there is an example in the proposed rules where the facts suggest such a fund would be respected as a partnership.
Ever.green view - As with our expectations that individuals will be limited participants in the program, our platform is not reliant on the participation of limited-purpose funds as credit buyers. However, consistent with our vision of creating a robust marketplace, Ever.green welcomes expansions to the universe of buyers to the extent such expansions are consistent with the existence of a quality, durable market.