The United States tax system provides opportunities for businesses and investors to buy transferable tax credits, mainly in the clean energy sector. These credits are aimed at spurring investment in renewable power, energy efficiency, and advanced manufacturing. The Inflation Reduction Act (IRA) significantly expanded the scope and flexibility of these tax credits. It has made them more accessible and valuable. With the latest set of regulations by the IRS prescribing the rules and definitions governing the transfer of qualifying credits, it has become easier to purchase tax credits.
How does one purchase tax credits in 2025? What types are available? How do they work? What factors does one consider as a buyer? This guide gives comprehensive answers to all such questions. Read on!
Purchase Tax Credits: Steps to Follow
Purchase tax credits without any hassle by following these steps:
Identify the Types of Tax Credits
An array of tax credits is currently available in the USA to purchase and claim, reducing the tax burden. The first step should be scoping the potential tax credits to purchase:
- Section 45 Production Tax Credit (PTC): It offers a credit per kilowatt-hour (kWh) for electricity generated from eligible renewable energy sources, including wind, solar, geothermal, biomass, and certain hydropower initiatives. The tax incentive is used to promote the generation of renewable energy resources.
- Section 48 Investment Tax Credit (ITC): The Section 48 ITC provides a credit for a portion of the investment in eligible energy property, such as solar panels, fuel cells, small wind turbines, geothermal systems, and energy storage solutions. For equipment applied after 2022, the baseline credit stands at 6% and can rise to 30% if the project fulfills prevailing wage and apprenticeship criteria.
- Section 45X Advanced Manufacturing Production Credit: Section 45X credit promotes domestic production of clean energy components like solar modules, wind turbine components, inverters, battery cells, and critical minerals. The credit is calculated per unit and varies based on the component produced.
- Section 30C Alternative Fuel Vehicle Refueling Property Credit: The Section 30C credit assists in financing the setup of refueling equipment for alternative fuel vehicles, including electric vehicle (EV) charging stations, hydrogen fueling stations, and natural gas refueling stations. It constitutes 6% of the cost and may rise to 30% if the prevailing wage and apprenticeship criteria are satisfied.
- Section 45Q Carbon Capture Credit: The Section 45Q credit provides a per-metric-ton credit for carbon oxide captured and either stored or utilized in a manner that prevents it from returning to the atmosphere. The credit varies based on the method of storage or use and the date placed in service of the carbon capture equipment.
Perform Due Diligence
Before you purchase tax credits, ensure that you check the legitimacy and compliance of the credits. Such verification entails reviewing all relevant documents, confirming project eligibility, and verifying the registration of the credits with the IRS. The financial status of the seller should also be determined, since some credits, like the ITC, have recapture periods when the credit is recoverable if certain conditions are not satisfied.
Negotiate Pricing and Terms
When you decide to purchase tax credits, don’t be afraid to negotiate. Tax credits tend to be sold at discounted prices from face value, depending on the market and the credit type. The negotiated price is a function of the credit quality, demand, and supply for the credit, as well as the fit of the credit to the buyer’s tax situation.
Finalize IRS Pre-Filing Registration
Both parties are required to undergo pre-filing registration with the IRS using the Energy Credits Online portal. This entails filing detailed information regarding the credit and parties. The IRS, upon approval, issues a registration number that needs to be used in order to complete the transfer. It’s advisable to start this process early, as it may take several weeks.
Finalize the Transaction
Having the registration number in place, the two parties can move to complete the transaction. This involves signing a transfer agreement containing the terms and conditions regarding the purchase tax credits. The payment is typically made in cash or its equivalent in accordance with IRS requirements. The seller then forwards the documents needed to the buyer so that the buyer can claim the credit.
Claim the Credit
The purchase tax credits must be reported in the tax return forms, such as Form 3800 for general business credits. Proper filing helps avoid violation of IRS regulations and permits the buyer to offset the credit against their tax bill. Taxpayers are strongly advised to consult a tax professional to handle this activity due to the complexities involved in claiming such credits.
Summing Up!
Tax credits can remarkably help reduce the tax burden of businesses and companies, and also contribute to the clean energy initiatives of the company. With a strategic approach that includes sufficient research on the available tax credits, due diligence, and collaboration with a reliable platform, businesses can purchase tax credits and maximise their benefits in the best possible way. Advanced planning and seeking professional advice can further add to the ease and help avoid common errors.