Final Rules on Transfers of Certain Credits (Inflation Reduction Act)

The IRS has released final regulations outlining the guidelines and definitions for transferring eligible credits during a taxable year, with a focus on rules applicable to partnerships and S corporations.

Thanks to the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors Act (CHIPs), taxpayers can now leverage manufacturing investment, clean energy investment, and production tax credits through elective pay or transfer provisions.

What It Means for Taxpayers

Starting from tax years beginning after Dec. 31, 2022, eligible taxpayers have the option to transfer all or part of their eligible credits to unrelated taxpayers in exchange for cash payments.

These transferred credits can then be claimed by the unrelated taxpayers on their tax returns. Notably, the cash payments received by eligible taxpayers aren't considered part of their gross income and aren't deductible by the unrelated taxpayers.

The final regulations also include provisions for handling excessive credit transfers and recapture events, offering clarity on determining such events, their tax implications, and the parties responsible for those impacts.

How to Register

Moreover, a mandatory IRS pre-filing registration process via an electronic portal is now in place. Before electing to transfer eligible credits, taxpayers must complete this registration process and obtain a unique registration number.

Partnerships and S corporations, as both eligible and transferee taxpayers, are subject to specific rules outlined in the final regulations.

Previously, the IRS had issued proposed and temporary regulations regarding credit transfers and the mandatory pre-filing registration process. Detailed instructions for using the pre-filing registration tool can be found in Publication 5884, available on IRS.gov.

Additionally, the IRS has updated its frequently asked questions (FAQs) section to reflect the changes introduced by the final regulations.

For more details, visit the Inflation Reduction Act of 2022 page on IRS.gov.

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