The Department of Treasury and the Internal Revenue Service (IRS) have released final rules detailing how to transfer certain tax credits in a taxable year. These rules, which are part of the Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPs) Act, aim to help taxpayers invest in manufacturing, clean energy, and production by allowing them to transfer tax credits to others.
Under these new rules, starting from Jan. 1, 2023, eligible taxpayers can transfer some or all of their tax credits to other taxpayers who are not related to them, in exchange for cash. These cash payments are not taxed as income for the taxpayers who transfer the credits and cannot be deducted by those who receive the credits.
The rules also cover special situations where too many credits are transferred or where there needs to be a reversal of credits. They define how to determine if such events have happened, the tax consequences, and who is responsible for these consequences. Additionally, there are specific steps outlined for using a mandatory IRS pre-filing registration process through an online portal, which must be completed to receive a registration number before opting to transfer credits.
For partnerships and S corporations, the guidelines specify their roles both as taxpayers transferring credits and those receiving them. The IRS had already proposed some of these rules and had temporary regulations for the pre-filing registration process.
Taxpayers can find step-by-step instructions for this registration process in Publication 5884, related to the Inflation Reduction Act and CHIPS Act. The IRS has also updated its frequently asked questions in light of these final regulations. More details are available on the Inflation Reduction Act of 2022 page on the IRS website.
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