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On April 25, 2024, the Treasury Department released final regulations on tax credit transferability. 

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As a general matter, the final regulations closely followed the proposed regulations and there was nothing that we found surprising. Still, the final regulations do provide some closure and certainty that should provide more comfort for buyers and sellers to transact.

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Top 5 Takeaways from the Release

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1) The passive activity rules still apply to buyers of tax credits.

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Atheva Insight: As a practical matter, buyers of tax credits will need to have passive income to be able to benefit from purchasing tax credits. This will limit the universe of potential buyers. 

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2) The risk of recapture still falls on the buyer of the tax credit.

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Atheva Insight: Buyers of tax credits will continue to seek protections from recapture risk and sellers of tax credits will want to consider what types of protections they can provide to buyers so that buyers feel secure that any recapture risk is minimized.  

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3) The regulations did not adopt comments that would have allowed sales of distinct aspects of a credit to be sold from the rest of the credit.
(e.g. the portion of the credit attributable to domestic content)

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Atheva Insight:  While the rules do not allow for sales of vertical slices of tax credits, they still do allow sellers of a tax credit to sell part of an overall tax credit to different buyers. 

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4) The preamble acknowledged that it is possible for a buyer of a tax credit to also make a loan to the seller of the tax credit. 

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Atheva Insight:  A loan could allow a buyer to provide cash to a seller that can be used to finance the development of the project and the buyer can be paid back (in whole or in part) with the delivery of tax credits. Of course, parties should be careful to ensure that any loan is treated as a loan, and not re-characterized as a prepayment of the purchase price. Although this may have been understood in previous releases, this inclusion in the preamble provides additional confirmation. 

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5) The final regulations provide that a numerical error with respect to a transferability election on a tax return can be corrected on an amended return or an administrative adjustment request.

Atheva Insight: This guidance will be helpful in fixing the inevitable clerical error that buyers and sellers may make on a return with respect to a tax credit transfer. 

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