Tax Credit Transfers and Direct Payments in the Inflation Reduction Act of 2022
February 26, 2024
Tax Credit Transfers and Direct Payments in the Inflation
Reduction Act of 2022
The Inflation Reduction Act of 2022 (IRA; P.L. 117-169)
• the clean fuel production credit (IRC §45Z);
created or modified 20 energy-related income tax credits.
These credits subsidize clean or efficient energy production
• the investment tax credit (IRC §48);
and usage by individuals and businesses.
• the qualifying advanced energy property credit (IRC
The IRA also created two credit delivery mechanisms that
§48C); and
extend the full value of IRA credits to organizations with
little to no tax liability. This In Focus explains how these
• the clean electricity investment credit (IRC §48E).
mechanisms benefit untaxed entities and businesses with
low tax liabilities, respectively.
Organizations receiving direct payments must file a return
with the IRS at the tax filing deadline (with applicable
Direct (Cash) Payments
extensions). Payments are only issued after returns have
Federal business tax credits have traditionally been
been processed. The untaxed entities eligible for direct
nonrefundable, meaning that if a business’s credits exceed
payments are
its tax liabilities, the business cannot receive the difference
as a refund. For example, if a business owes $4,000 of
• any private-sector entity exempt from federal income
income taxes but is eligible for $7,000 of credits, those
taxes, including 501(c)(3) organizations such as
credits reduce the business’s income taxes to $0. However,
hospitals, private colleges, and think tanks;
the federal government does not send the business a refund
for the remaining $3,000.
• state governments and political subdivisions thereof
(including city governments, county governments, and
This presents challenges for untaxed entities such as state
school districts) and Indian tribal governments;
and local governments, school districts, and nonprofits.
Because these organizations do not pay federal income
• the Tennessee Valley Authority;
taxes, they implicitly cannot benefit from nonrefundable tax
credits. Lawmakers have at times changed the income tax
• Alaska Native Corporations; and
code to incentivize certain behaviors (e.g., higher
investment) among businesses and individuals, but
• rural electricity cooperatives.
nonprofits and other groups exempt from income tax do not
respond to such incentives. To incentivize clean energy
Organizations that are not exempt from taxation can also
investments across a wider range of organizations, the IRA
elect to claim direct payments in place of the credits for
allows certain untaxed entities to receive direct cash
carbon oxide sequestration, clean hydrogen production, and
payments of equal value to 12 nonrefundable tax credits:
advanced manufacturing production. They may do so for
five years, starting with the year a facility is placed in
• the alternative fuel vehicle refueling property credit
service. This election cannot be made after 2032.
(AFVRPC; Internal Revenue Code [IRC] §30C);
Credit Transfers
• the production tax credit (IRC §45);
Entities not eligible for direct payments may transfer any of
the credits listed in the previous section, with the exception
• the credit for carbon oxide sequestration (IRC §45Q);
of the credit for qualified commercial clean vehicles. Credit
transfers occur when one business sells its credits to another
• the zero-emission nuclear power production credit (IRC
at an agreed-upon price in exchange for cash.
§45U);
Such transfers hold two potential benefits for firms. First,
• the clean hydrogen production credit (IRC §45V);
businesses can sell their credits for a price between the
credit’s maximum value and the business’s income tax
• the credit for qualified commercial clean vehicles (IRC
liability. For example, if a firm owes $4,000 of federal
§45W);
income taxes but has a credit worth $7,000, it can sell the
credit to a second firm for $6,000. In this example, the first
• the advanced manufacturing production credit (IRC
firm gains $2,000 (because it pays an additional $4,000 in
§45X);
taxes but receives $6,000 in cash), while the second firm
gains $1,000 (because it buys the credit for $6,000 but
• the clean electricity production credit (IRC §45Y);
reduces its taxes by $7,000). Second, whereas traditional
https://crsreports.congress.gov
link to page 2 link to page 2 Tax Credit Transfers and Direct Payments in the Inflation Reduction Act of 2022
tax credits are only claimed after firms file their taxes,
presumably estimate the net savings to the government to
transfers may occur at any time. Businesses in need of
be less than the projected amount of direct payments issued.
liquidity can sell their credits instead of taking out loans,
which is especially important when interest rates are high.
The JCT has not published estimates of the fiscal costs of
credit transferability.
Under proposed IRS regulations, if a firm is deemed
ineligible for a credit it has already sold, the liability falls
Table 1. Statutory Cost of IRA Direct Cash Payments
on the purchaser of the credit. This could cause transferable
Dollars in billions, FY2022-FY2031
credits to trade at less than their full values if buyers factor
these potential losses into their purchasing decisions. It also
Direct
Total
Direct Pay
explains why insurance coverage is built into most credit
Payments
Costs
Share
purchase agreements. Last year, 74% of credit transfers
included insurance coverage for the buyer.
Advanced
Manufacturing
$14.7
$30.6
48.0%
Research has found that transferred tax credits typically
Production Credit
sold at 89 to 95 cents on the dollar in 2023. Trading values
Zero-Emission
differed significantly based on deal size. Credits purchased
Nuclear Power
$14.4
$30.0
48.0%
for less than $10 million traded at 89 cents on the dollar,
Production Credit
whereas purchases exceeding $100 million traded at an
average of 95 cents on the dollar. It is not clear how much
Clean Hydrogen
$5.3
$13.2
40.4%
of the difference between the credits’ sales prices and their
Production Credit
maximum values was attributable to liability concerns, the
Credit for Carbon
preference for immediately available cash, or other factors.
$1.6
$3.2
48.0%
Oxide Sequestration
The clean vehicle credit (IRC §30D) and the used clean
Clean Electricity
$0.03
$11.2
0.2%
vehicle credit (IRC §25E) are eligible for a special type of
Production Credit
credit transfer from consumers to car dealers. Such transfers
Source: Joint Committee on Taxation.
are discussed in CRS In Focus IF12570, Clean Vehicle Tax
Notes: The credit for carbon oxide sequestration predated the IRA,
Credit Transfers to Car Dealers, by Nicholas E. Buffie.
and the estimate in this table only includes costs incurred under the
Intersection of the Two Mechanisms
IRA. The JCT estimated in its 2020 tax expenditures report that the
credit would cost $0.1 bil ion over FY2020-FY2024.
Entities eligible for direct pay cannot sell their credits.
However, the law does not explicitly ban them from buying
Additional Issues for Consideration
credits and receiving direct payments for those credits.
These provisions have engendered various policy questions.
Proposed IRS regulations would disallow such “credit
chaining” for the sake of compliance with other aspects of
First, some tax professionals have argued that individuals
the regulations, which state that entities must own any
should be allowed to buy transferrable tax credits from
energy properties for which they receive direct payments.
businesses. Proposed Treasury regulations only permit
Fiscal Costs
business-to-business transfers, but Treasury indicated that it
was reconsidering its stance in October 2023.
In its August 2022 cost estimate, the Joint Committee on
Taxation (JCT) estimated that the federal government will
Second, a temporary IRS regulation from June 2023
issue $36 billion of direct payments over FY2022-FY2031
stipulates that organizations must register each property
for the five credits shown in Table 1. The JCT stated that
separately in their direct pay applications. Based on the
direct payments would be “negligible” for five other
legal definition of property, certain organizations must file
credits, and it did not provide cost estimates for the direct
paperwork for hundreds of essentially identical properties.
payment portions of the AFVRPC and the credit for
For example, because each wind turbine is considered a
qualified commercial clean vehicles.
separate property, wind farms may register hundreds of
turbines. Some commentators have suggested that energy
The gross direct payment estimates in Table 1 may slightly
providers be allowed to group similar properties in their
overstate the net costs of direct payments. This could occur,
applications, thus reducing paperwork.
for example, if the direct pay provisions incentivize an
untaxed entity to make a clean energy investment that
Third, Congress could change the number of credits eligible
otherwise would have been made by a taxable corporation.
for direct payments and transfers. On the one hand, if these
In this case, direct payments to the untaxed entity would
mechanisms prove effective at increasing clean energy
merely displace traditional tax credits that would otherwise
investment, Congress could expand them to other parts of
have been claimed by a taxable corporation. Although
the tax code. On the other hand, if these mechanisms prove
JCT’s dynamic scoring model includes such displacements
unexpectedly expensive, Congress could limit or eliminate
in its total cost estimates (shown in the “Total Costs”
them in an effort to decrease the federal budget deficit.
column), the direct payment estimates do not distinguish
between new costs incurred due to direct pay and costs
shifted from traditional credits to direct pay. If the direct
Nicholas E. Buffie, Analyst in Public Finance
payment mechanism were repealed, the JCT would
IF12596
https://crsreports.congress.gov
Tax Credit Transfers and Direct Payments in the Inflation Reduction Act of 2022
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12596 · VERSION 1 · NEW