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To monetize these credits, taxpayers must register through the IRS’s IRA Pre-Filing Registration Tool and obtain a registration number. This number must be included on the taxpayer’s annual return when making a Direct Payment Election or Transfer Election.
Not-for-profit Entities are eligible for Direct Pay
Under Code Sec. 6417 a tax-exempt organization, State, Indian tribal government, etc. (applicable entity) may elect to be treated as making a federal income tax payment equal to the amount of the energy credit.
Direct Pay Election:
This allows tax-exempt entities, such as non-profits, universities, and government bodies, to receive direct cash payments instead of tax credits. This is beneficial for entities that do not have a federal tax liability,
For Profit Entities are eligible for Transferability
Under Code Sec. 6418 a taxpayer that is not an applicable entity may elect to transfer all or a portion of the credit to an unrelated taxpayer.
Transfer Election: For-profit businesses with low tax liability can sell their tax credits to unrelated third parties for cash. This creates a new financing tool, enabling businesses to benefit from tax credits even if they have minimal or no federal tax liability.
The process of selling renewable energy tax credits involves several key steps. Here’s an overview:
Eligibility: First, ensure that you are an eligible taxpayer. Generally, for-profit entities that are not eligible for the Direct Pay Election can sell their tax credits.
Pre-Certification: Before selling, you must comply with a pre-certification process. This involves registering through the IRS’s IRA Pre-Filing Registration Tool and obtaining a registration number.
Identify potential buyers for your tax credits. Buyers are typically entities with tax liabilities looking to reduce their tax burden.
Negotiate the terms of the sale, including the price and any conditions. Once agreed, formalize the transaction through a binding contract.
Provide the buyer with the necessary documentation to validate the existence and amount of the tax credits being transferred. This ensures transparency and compliance with IRS requirements.
The buyer makes the payment for the tax credits. Payments must be made no earlier than the first day of the seller’s taxable year and no later than the seller’s tax filing date.
Both parties must report the transaction on their respective tax returns. The seller includes the registration number and details of the transfer, while the buyer claims the tax credits.