Transferable Energy Tax Credits Under IRC § 6418: What Buyers and Sellers Need to Know

The Inflation Reduction Act (IRA) brought sweeping changes to the energy finance space by incentivizing new technologies and expanding older programs. One of those changes is the ability to transfer eligible tax credits between taxpayers for cash consideration under § 6418 of the Internal Revenue Code. This section allows selling taxpayers (the eligible taxpayer) to monetize tax credits when they otherwise would not have sufficient taxable income to use the credits against and deliver more value than carrying tax credits back or forward. Monetizing unusable credits by selling them for cash to taxpayers with sufficient tax capacity makes projects more economically viable by reducing capital expenditure. Buyers (the transferee taxpayer) can generate savings by reducing their tax liability and saving the difference between that liability and the credit purchase price. § 6418 allows taxpayers to transfer Investment Tax Credits (ITCs), Production Tax Credits (PTCs), Carbon Oxide Sequestration Credits (45Qs), and even Qualified Advanced Energy Project Tax Credits (48Cs).

When negotiating Tax Credit Transfer Agreements (TCTAs), parties should be aware of the following issues:

• Registration: Online registration with the IRS should be done in the tax year when the investment property or facility is placed in service and should be done at least 120 days (including extensions) before the credits are filed on a return. Each project will receive a registration number, which is used to report on the returns of both parties to identify the type and amount of credit, as well as the tax identification information of the transacting taxpayers. Registration is a common condition precedent to closing a tax credit transfer transaction.
• Placed in Service Dates (Applicable for ITCs): Taxpayers should be cognizant of construction timing for ITC and 48C projects, as the ITC and 48C tax credit is considered earned in the year the project is placed in service. In the event a project slips from one tax year to the next, the tax credit will not be usable or able to be claimed in the prior year.
• Regular Progress Reporting (Applicable for PTCs): Taxpayers negotiating PTC deals should have a mechanism in place requiring sellers to regularly report the amount of eligible components produced and tax credit generated. Additionally, these progress reports should detail anticipated future production to help buyers assess whether the seller can meet purchase commitments. True-up mechanisms and shortfall provisions can provide a pathway forward in the event of production challenges arising.
• Indemnity and Guarantee: Indemnity provisions cover what will happen if the tax credits are disallowed by the IRS or no longer eligible, either through fault or a change in law. Indemnity provisions are designed to give buyers certainty that they will be made whole in the event of a loss. Two typical routes are guaranteed by a parent company seller of the tax credits or through insurance.
• Change in Law: The legislative landscape is consistently shifting, and these provisions help the parties establish what happens if the law changes and who bears that risk. Change-in-law provisions should also account for laws and regulations outside the tax code that could affect tax credits. For example, in 45Q situations, if laws and regulations change regarding sequestration wells or monitoring, verification, and reporting plans, these changes likely would not be in the federal tax code but can still impact the taxpayer’s ability to claim a 45Q tax credit.
• Tax Contest Language: TCTAs should include language on how an audit is handled and, at a minimum, what consent rights, if any, are given to the parties in the event of a potential settlement with the IRS. Audit defense is often a collaborative effort, as buyers may need project documentation during an audit that is not required to meet the minimum documentation regulations.
• Foreign Entity of Concern (FEOC): Since the passage of the One Big Beautiful Bill Act (OBBBA), FEOC concerns are top of mind for every party looking to buy or sell IRA tax credits. Sellers may need to represent to buyers that they have complied with any applicable FEOC requirements and provide some level of documentation to substantiate the same for due diligence purposes. For more on this topic, see our article on FEOC concerns.
• Due Diligence Documentation: CFR 1.6418-2 requires the selling taxpayer to provide the buyer with the required minimum documentation to substantiate the claim and any bonus amounts (such as prevailing wage and apprenticeship) earned. While the standard due diligence process will likely go beyond the required minimum documentation, buyers should feel comfortable that the project exists when it has been placed in service (if purchasing ITCs) and that any important ancillary documents, such as power purchase agreements, lease agreements, etc., have been reviewed.
• Attorney Fees: The current market custom is that the seller pays buyer counsel fees up to a specified amount. Parties entering this space for the first time should be aware of this custom. When discussing tax contest provisions, the parties should also consider continuing audit defense fees in the event consent rights are given, and a party does not consent to a settlement offer, thereby forcing a longer audit defense.
• Draft Transfer Election Statement: A draft transfer election statement is often part of closing documentation and helps the parties confirm compliance with CFR 1.6418-2(b)(5).

As the market for transferable tax credits under IRC § 6418 continues to mature, both buyers and sellers must navigate a complex regulatory and contractual landscape shaped by evolving IRS guidance, heightened diligence expectations, and shifting legislative priorities. Careful attention to registration requirements, risk allocation, audit mechanics, and change‑in‑law provisions is critical to preserving the economic value of these transactions and avoiding unexpected exposure. With thoughtful structuring and informed negotiation, tax credit transfer agreements can serve as a powerful tool to unlock capital and advance energy and infrastructure projects under the Inflation Reduction Act.

Treasury and IRS recently released proposed FEOC regulations that may affect transferable tax credit transactions and are subject to change following the comment period. We will publish a follow-up article with early, practical guidance on interpreting these proposed rules as the regulatory framework continues to develop.