Tax Credit FAQ

Renewable energy tax credits are incentives provided by the federal government to encourage investment in clean energy technologies. Unlike deductions, which reduce taxable income, tax credits directly reduce tax liability on a dollar-for-dollar basis. The major types include the Investment Tax Credit (ITC), Production Tax Credit (PTC), and various manufacturing and clean energy credits expanded or introduced by the Inflation Reduction Act of 2022.

Tax credits provide a dollar-for-dollar reduction in the actual tax liability, whereas tax deductions reduce the amount of income subject to taxation. For example, a $1,000 tax credit reduces your tax bill by exactly $1,000, while a $1,000 tax deduction reduces your taxable income by $1,000, which translates to a reduction in your tax bill based on your tax bracket (e.g., $220 if you're in the 22% tax bracket). This direct reduction makes tax credits generally more valuable than equivalent deductions.

Qualifying technologies vary by credit type but generally include:

• Solar energy systems (photovoltaic, solar heating)
• Wind turbines and wind farms
• Geothermal energy systems
• Fuel cells
• Energy storage systems (standalone or paired with generation)
• Biomass facilities
• Hydropower
• Marine and hydrokinetic energy
• Carbon capture and sequestration equipment
• Clean hydrogen production facilities
• Manufacturing facilities for renewable energy components

Each technology has specific technical requirements that must be met to qualify.

Bonus credits provide additional tax credit value beyond the base rates. The main bonus opportunities include:

• Prevailing Wage & Apprenticeship Bonus (5x): Projects that pay prevailing wages and use qualified apprentices for a percentage of labor hours can receive a 5x multiplier on the base credit rate.
• Domestic Content Bonus (10%): Projects that use domestically produced steel, iron, and manufactured components.
• Energy Community Bonus (10%): Projects located in energy communities, which include brownfield sites, areas with fossil fuel employment history, or areas with coal plant/mine closures.
• Low-Income Area Bonus (10-20%): Certain facilities serving low-income communities can receive an additional 10-20% credit (subject to capacity limitations).

Each bonus has specific documentation and verification requirements to qualify.

Section 6418 of the Internal Revenue Code, introduced by the Inflation Reduction Act of 2022, allows eligible taxpayers to transfer all or a portion of specified clean energy tax credits to unrelated taxpayers for cash. This mechanism enables developers without sufficient tax liability to monetize their tax credits directly, rather than using complex tax equity structures.

Key features of transferability include:

• Transfers are for cash (not property or services)
• Payments received are not taxable income to the seller
• Payments made are not deductible by the buyer
• The election is irrevocable
• Pre-filing registration with the IRS is required
• Detailed documentation must be exchanged between parties

OB3 Consideration: The One Big Beautiful Bill preserves the Section 6418 transfer mechanism but introduces modifications to which credits remain eligible for transfer as certain credit types are phased down or eliminated. Projects that meet begun-construction requirements before OB3 effective dates generally retain their transferability under existing rules. Buyers and sellers should review pipeline deals against the updated eligibility timelines.

Sellers (Transferors): Any taxpayer subject to federal income tax that is eligible for the specified tax credits can sell them, with the exception of tax-exempt organizations, governmental entities, tribal governments, Alaska Native Corporations, rural electric cooperatives, and the Tennessee Valley Authority (these entities may use direct pay under Section 6417 instead).

Buyers (Transferees): Any taxpayer subject to federal income tax can buy tax credits, with some restrictions:

• Buyers cannot be related to the seller within the meaning of IRC §§ 267(b) or 707(b)(1)
• Buyers must have sufficient tax liability to utilize the credits
• Buyers cannot resell the credits (no secondary market)

Common buyers include corporations with significant tax liability, financial institutions, insurance companies, and high-net-worth individuals.

The "placed-in-service" date is when a facility becomes eligible for tax credits and begins the credit period. The IRS and tax courts have established a five-point framework to determine when a project is officially placed in service:

1. Physical Construction Complete: The facility is physically complete and capable of functioning as designed.
2. Permits and Licenses Obtained: All necessary regulatory approvals have been secured.
3. Legal Requirements Met: The legal framework for operation is established (PPAs, interconnection agreements, etc.).
4. Control Transfer: The taxpayer claiming the credit has control over the facility.
5. Grid Synchronization: The facility is delivering electricity to the grid or end-user.

The placed-in-service date is generally the latest date on which all five criteria have been met. Comprehensive documentation of each criterion is essential for establishing this critical date.

Recapture occurs when a tax credit is "taken back" by the IRS after being claimed. This typically happens when:

• The facility ceases to qualify as an eligible facility
• The taxpayer fails to maintain compliance with ongoing requirements
• The IRS determines that the credit was improperly claimed or calculated
• For ITC, the property is disposed of or ceases to be qualifying property within the recapture period (typically 5 years)

When recapture occurs, the taxpayer must repay the credit amount, often with interest and potential penalties. For transferred credits under Section 6418, the transferee (buyer) is generally responsible for recapture if a recapture event occurs after the transfer. Both parties should acknowledge recapture rules in the transfer election statement.

To mitigate recapture risk, tax credit transfers often include indemnification provisions, insurance, escrow arrangements, or other protections for the buyer.

Several forms are required for tax credit transfers:

• Relevant Source Credit Form: The IRS form for the specific credit type (e.g., Form 3468 for ITC, Form 8835 for PTC)
• Form 3800 (General Business Credit): Aggregates business credits and must reflect the transferred credit
• Transfer Election Statement: A written document signed by both parties that contains all required information about the transfer
• Schedule Attached to Form 3800: Shows the amount of eligible credit transferred for each credit property

Before filing these forms, the transferor must complete the IRS pre-filing registration process and obtain a registration number, which must be included on the forms and election statement.

The transfer election must be made on an original, timely filed tax return for the year the credit is determined—not on an amended return. Both parties must attach the relevant documentation to their respective tax returns.

A transfer election statement must include the following information:

• Identifying Information: Names, addresses, and taxpayer identification numbers of both the transferor and transferee
• Credit Details: Description of the eligible credit being transferred (e.g., Section 48 Energy Investment Credit)
• Credit Amount: Total credit amount determined and the specific portion being transferred
• Taxable Year: Transferor's taxable year and the first taxable year in which the transferee will claim the credit
• Financial Terms: Amount and date of cash consideration paid by the transferee
• Registration Number: The IRS registration number for the eligible credit property
• Related Party Attestation: Statement that the parties are not related within the meaning of IRC §§ 267(b) or 707(b)(1)
• Compliance Statement: Representation that all Section 6418 requirements have been or will be satisfied
• Recapture Acknowledgment: Statement acknowledging recapture requirements
• Documentation Statement: Statement that required minimum documentation has been provided to the transferee
• Signatures: Signatures of authorized representatives from both parties under penalty of perjury

There is no prescribed IRS form for this statement, but all required information must be included for a valid transfer election. The statement must be labeled as a "Transfer Election Statement" and attached to both parties' tax returns.

The One Big Beautiful Bill is reconciliation legislation that modifies several IRA clean energy tax credits. Key changes include accelerated phase-down timelines for certain credits, modifications to domestic content and prevailing wage requirements, and potential restrictions on credit eligibility for projects with foreign entity involvement. Existing projects with begun-construction safe harbor protections may be grandfathered under prior rules.

OB3 preserves the Section 6418 transfer mechanism but introduces modifications to which credits remain eligible for transfer as certain credit types are phased down or eliminated. Credits for projects that meet begun-construction requirements before the effective date generally retain their transferability. New restrictions may apply to credits generated by projects with certain foreign entity of concern (FEOC) connections.

OB3 accelerates the phase-down of several clean energy credits. The clean vehicle credit (30D) faces immediate restrictions on battery component and critical mineral sourcing. The clean electricity production credit (45Y) and clean electricity investment credit (48E) face accelerated sunset provisions. The advanced manufacturing production credit (45X) may see reduced rates for certain components. Projects that have begun construction before the effective dates may qualify for transition relief.

OB3 strengthens domestic content requirements by tightening the definition of domestic manufacturing and increasing the percentage thresholds for iron, steel, and manufactured components. Projects that have already met the existing domestic content requirements and claimed the bonus may be grandfathered, but new projects will need to meet the higher standards.

Both parties should review existing deal terms and pipeline projects against the proposed changes. Sellers should accelerate begun-construction activities where possible to lock in current credit rates and eligibility. Buyers should conduct enhanced due diligence on credit sunset timelines and FEOC exposure. Both parties should consult tax counsel on transition rules and grandfather provisions. Deal Star tracks OB3 developments and updates compliance workflows as legislation is finalized.