Under the provisions of the Inflation Reduction Act of 2022 (IRA) taxpayers have been given greater access to the benefit of the energy tax credits even if they have no federal tax liability.

The Act aims to support the expansion of the renewable energy industry by extending existing energy tax credits and introducing a number of new energy credits. The tax credits traditionally given for renewable energy have been extended to new technologies, including clean hydrogen. The value of the credits available for other technologies, such as carbon capture, has been increased; and the provisions of the Act incentivise the manufacturing of advanced technologies and mining of raw materials that are important for those technologies.

In June 2023 the IRS issued proposed regulations on two new investment techniques, receiving hundreds of comments, and also held a public hearing. The two sets of rules for credit monetisation allow taxpayers to access the benefit of the energy tax credits even with little or no federal tax liability.

The Direct Pay Election permits tax-exempt entities to receive the energy credit in the form of a direct cash payment. This would be of interest to non-profit organisations, universities, utilities and State and local governments.

The Transfer Election allows for-profit businesses with a low or no tax liability to sell their credits to an unrelated third party for cash. There are some potential risks for buyers using the Transfer Election and these need to be addressed through contract negotiations and indemnity agreements. The buyer should consult advisors with the relevant experience before entering into the contract.

In December 2023 the IRA Pre-Filing Registration Tool was launched, enabling taxpayers to access the benefits of the new rules and develop clean energy projects in 2024 and later years. The online tool is available for taxpayers intending to monetize the energy tax credits. Taxpayers electing to transfer energy credits, or taxpayers planning to elect for direct payment refundable credits, are required to register through the tool and receive a registration number before monetizing their energy credits. A user guide and instructional video have been released by the IRS. The registration number when received should be included on IRS Form 3800, General Business Credits, when making a direct payment election or making the transfer election.

The Treasury is aiming to finalise the rules early in 2024 so taxpayers and investors can have certainty on how to comply with the requirements.