Final Tax Credit Transfer Rules are Out and They’ll be Hard to Roll Back

Yesterday, the IRS released the final version of the regulations governing the transfer of tax credits under the Inflation Reduction Act.

Here are our initial takeaways:

• The regulations were adopted in substantially the same form they were proposed: Changes appear to have been minimal and focused around technical issues such as error correction, recapture calculation, and trust ownership. The IRS generally hewed to original proposals, including in areas that received significant pushback, such as the IRS’s application of passive loss rules to transferees and its disallowance of the sale of isolated “bonus” credits. The regulations also restated the proposed rule that marketplaces cannot purchase an interest in tax credits as an intermediary and resell them in order to make a market.

• The regulations will now be more difficult to overturn via Congressional resolution: The Congressional Review Act allows Congress (together with the President, or without the President if Congress can override a Presidential veto) to overturn regulations it disagrees with, by a simple resolution, within 60 legislative days of its finalization. Since the regulations are now final, the IRS can submit them to Congress, effectively starting the 60 legislative day clock. This clock will run out before a new administration can take its place, thus removing the possibility to overturn this groundbreaking legislation via a simple resolution. 

• Ever.green and similar marketplaces will be important: Given their similarity to the proposed rules, the final regulations leave the overall risk structure of the transferability market, as we previously understood it, intact. Transferability promises much greater simplicity than the traditional tax equity market and the potential entrant of new players to the market both on the demand and supply side. But the legislation still, as a default, stipulates that buyers assume the risk of excessive credit transfer and recapture. To truly tap the potential of the new transferability regime, we believe marketplaces such as Ever.green will be essential to make buyers comfortable with this new asset class, by connecting buyers with reputable developers, providing market insights around prices and contract terms, and serving to assemble ecosystems of service providers to de-risk projects through diligence or insurance.

We will continue to review the rules and follow the discussion around them. A complete copy of the adopting release can be found here.