Transferability of tax credits allows the taxpayer who earns a tax credit to sell it to another taxpayer.
What is a tax credit?
A tax credit allows an individual or business to apply the amount of the credit they earn to their tax bill on a dollar for dollar basis, to reduce their tax liability—in other words, it allows a taxpayer to subtract the amount of the credit from the total amount they owe to a government tax agency. Tax credits are a mechanism that policymakers use to incentivize certain investments and behaviors.
Transferable tax credits
For most tax credits, the individual or entity who qualifies for the credit is the one who claims it on their tax return. Transferable tax credits are different: Taxpayers who earn transferable credits can sell them (one time only) to another taxpayer who wishes to reduce their tax liability.
Typically, a buyer purchases transferable tax credits at a discount. For example, a buyer of $100,000 in transferable tax credits may agree to purchase the credits for 80 cents on the dollar. This means they pay $80,000 for credits that allow them to reduce the taxes they owe by $100,000, resulting in a gross profit of $20,000 on the transaction, not including any related transaction costs.
Why are certain tax credits transferable?
Policymakers make certain tax credits transferable to enhance the effectiveness of the credit as a government subsidy for a desired investment. With a nontransferable tax credit, the utility of the credit as an incentive is limited by the tax liability of the taxpayer earning it. Making the tax credit transferable removes that limitation.
For example, under Section 48E of the Internal Revenue Code, a business may claim a standard Investment Tax Credit usually worth 30% of the qualifying costs of building a clean energy asset, such as rooftop solar or battery storage. But given the high up-front cost of building these projects, the full tax credit may be much larger than the owner’s tax bill. In this case, the taxpayer may instead choose to sell their tax credit to a third party with tax liability.
Transferability and clean energy tax credits
The Inflation Reduction Act (IRA) of 2022 introduced a number of new transferable tax credits aimed at increasing the production of clean energy and manufacture of renewable energy equipment in the U.S. Some of these tax credits are entirely new, while others are tax credits that already existed in the tax code, but that were modified to be made transferable for the first time.
Among these tax credits are several related to clean energy production, including:
Considerations surrounding transferability
Tax-credit transfers are subject to IRS rules, filing requirements, and restrictions:
- Credit registration: The IRS requires sellers to identify their clean energy projects through a formal registration process
- Eligible sellers: For-profit business entities may sell all or some of the clean energy tax credits they earn.
- Eligible buyers: The IRS restricts the purchase of clean energy tax credits to corporations or individuals with passive income.
- One-time transfer: Clean energy tax credits may only be transferred once.
- Tax filings: Both the seller and buyer must include specific tax forms with their tax filings to formalize the tax-credit transfer
- Tax treatment on sales: Payment received for tax credits is not considered taxable income. Similarly, the tax benefit for the buyer is also non-taxable.
- Carryback and carryforward provisions: Purchased tax credits can be carried backward for three tax years and forward for 20 years, subject to additional rules. However, a tax credit may not be carried back to a year in which it did not exist.
- Required diligence: The IRS requires buyers of tax credits to conduct due diligence on the sellers and projects from which they are purchasing tax credits.
When transferred tax credits can be claimed
Tax credits belong to a specific tax year, which affects when and how buyers can purchase and claim them. The year associated with a given tax-credit claim corresponds to the date a seller’s tax year ends.
Consider the example of credits for a project placed into service in October 2025. The calendar year of these tax credits is 2025. But the tax year associated with the credits depends on when the project owner’s tax year ends. If the end of the project owner’s tax year is December 31, 2025, then the associated year for the credits is 2025. But if the seller’s 2025 tax year ended before the asset was placed into service, the associated year would be 2026.
A buyer of tax credits must claim the purchased credits in the first tax filing they make after the seller files the tax return in which they confirm the election to transfer credits.
Purchased credits apply first to the buyer’s tax liability for the tax year already associated with the credits, as outlined above. Tax credits may then be carried backward and forward according to rules set by the IRS.
Who buys transferable tax credits?
The IRS rules for transferable tax credits typically subject their use to the passive activity rule, which means that an investor who is not actively or materially involved in an investment may not use any resulting tax credits against their active income.
The passive activity rule applies to clean energy tax credits, which restricts their transfer to taxpayers who intend to use them to lower their tax liability on passive income.
For this reason, buyers of transferable tax-credit buyers are businesses or individuals with significant tax liability on passive income. Many of these investors may be existing tax equity investors who are seeking new opportunities or smaller, custom deal sizes to offset their tax liability on an as-needed basis. These include:
- Banks
- High net-worth individuals
- Family offices
- Larger corporations with significant passive income
Potential changes to transferability
On May 12, 2025, the House Ways and Means Committee released a draft bill that would significantly alter provisions surrounding the transferability of clean energy tax credits. On May 22, the House passed its version of the reconciliation package, which included steep cuts to transferable clean energy tax credits.
The House bill would sunset most clean energy tax credits within two years of its passage. As of May 22, 2025, the matter was before the U.S. Senate, where senators have vowed to make many significant changes to the legislation.
Learn more about buying and selling transferable tax credits
Evergrow helps clean-energy project developers, REITs, and investors buy and sell Section 48 and Section 48E investment tax credits.
To learn more, click the Get Started button below to get in touch with a member of our team.
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