The Internal Revenue Service's final regulations on
"When I'm talking to clients, often the questions are really, am I eligible? How much is the credit for? What do I need to do to claim it?" said Jess LeDonne, director of policy and legislative affairs at The Bonadio Group in Rochester, New York. "Internally, we're really seeing these pick up, and we want to make sure we know the actual nuts and bolts of how you claim the credit and how you complete the pre-filing registration process."
In addition to the final regulations, which are fairly technical, the IRS has been issuing much more readable guidance on these and similar provisions in the Inflation Reduction Act.
"Now that we have guidance, we can actually help walk our clients through what to do," said LeDonne. "With the Inflation Reduction Act, I've been very impressed with the IRS guidance that has been released being quite user friendly. They've done a really good job with this law of putting out really clear, concise, one-page overviews. They might have charts, tables, checklists, user guides. There's all sorts of actual usable, digestible plain language guidance that will help a lot of taxpayers not feel like they have to go read a regulation to understand what they need to do."
The information is all available on IRS.gov. "It's quite easy to find," said LeDonne. "If you're going to the IRS website, and you look at the program or credit you're interested in, you'll likely find that easy to use guidance. That's been really nice for taxpayers, with the transfer piece and the clean energy piece specifically. We're seeing unique ways to utilize these credits."
The website includes
"One of the big marquee provisions of the Inflation Reduction Act was elective pay, or direct pay," said LeDonne. "That would allow tax-exempt entities to utilize tax credits. That was a big boon for those tax-exempts, local government, nonprofits, anything like that, to utilize tax credits. Additionally, this transfer piece on which we have newly released final regulations, is going to benefit taxpayers. It's essentially the opposite eligible group from the elective pay. Elective pay is if you're tax exempt, and transfer is for taxpayers. With the credit transfer, eligible taxpayers can essentially set up a one-time transfer or sale of the credit to a non-related party for cash. It's just another creative way that the law has made these credits more usable across different types of entities."
The final regulations offer guidelines on clean vehicle tax credits, such as electric cars, and those tax credits can be transferred as well.
"The transfer piece is a way to shuffle the credits around different entities to use them," said LeDonne. "With the newly released guidance for the clean vehicles, there's a similar provision that allows for transfer or advanced payment of the credit via the dealership, so the car dealership can essentially advance pay that credit out to the buyer, so they're getting the full credit at the time of sale."
Credit brokers have been operating exchanges where taxpayers can buy and sell clean energy tax credits, and the final rules include information pertaining to them.
"The final regulations on the transfer of credits did speak to those kinds of setups and broker fees, if you're using a credit broker in that way, the taxability of those fees," said LeDonne. "For the buyer and the seller, the entities that are transferring the credits, it's essentially a tax-free transaction, so the cash payments are not included in the gross income for the seller, and they're not deductible by the buyer. Payments received to credit brokers are taxable to the broker."
The final regulations can get extremely detailed, but time is of the essence if taxpayers want to claim the tax credits.
"They did really try with these final regulations to get into the actual nitty gritty," said LeDonne. "How can you do these kinds of transactions? What are the impacts going to be for all the related entities? The timeliness of all this becomes of the utmost importance. In order to do any sort of elective pay or credit transfer structure under the inflation Reduction Act, you have to complete a pre-filing registration process, essentially declaring your intention to do so, sending that information over to the IRS in their online portal. And that's all time sensitive. It has to be done prior to claiming the credit."
The guidance on the IRS website can help taxpayers claim those tax credits in time. "There's just been so much guidance that I think is really digestible and usable out there," said LeDonne. "I would encourage practitioners and taxpayers alike to go to the IRS website and see if they can access those checklists and user guides, because they really are attempting to make everything quite user friendly out there."
