The Internal Revenue Service (IRS) does more than collect taxes. The agency often has a negative reputation, but it is responsible for numerous duties, from tax return processing, enforcement, criminal investigations and oversight of tax-exempt organizations and qualified retirement plans.
The IRS is the largest of the United States Department of Treasury’s nine bureaus, which include the Financial Crimes Enforcement Network (FinCEN), the Inspector General and the U.S. Mint. Although you typically hear the IRS discussed a lot in April, the agency was in the news recently when it announced the launch of its new IRA/CHIPS Pre-filing Registration Tool.
What Is the IRA/CHIPS Pre-Filing Registration Tool?
The new tool, also referred to as a portal, enables qualifying businesses, tax-exempt organizations or entities such as state, local and tribal governments to pre-register eligible renewable energy tax credits as required by the Inflation Reduction Act (IRA). As we mentioned in a previous blog, these credits are Investment Tax Credits (ITCs) established through the Energy Policy Act (EPACT) of 2005 to facilitate the adoption of clean energy.
Through the IRA, these ITCs are available to qualified buyers — even if they do not have taxable income — through new direct pay and transfer election options. The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act makes it possible for eligible taxpayers to claim direct pay for specific investments in silicon chip manufacturing technology.
What exactly is direct pay, also referred to as elective pay? It provides direct pay from the government to qualified entities — primarily tax-exempt businesses and governmental agencies, including Tribal ones — for the full value of the renewable energy tax credits. Developers in renewable energy do not qualify for direct pay, but it is a part of the IRA tax credit process of which to be aware.
A transfer election is different in that it allows taxpayers qualified for a renewable energy tax credit — but not eligible to utilize direct pay — to transfer some or all of their ITC to a third-party buyer in exchange for cash. In this method, the developer and buyer negotiate and agree to the terms and pricing.
There are multiple requirements for transfer election statements. The entity submitting it must include developer (seller) and buyer data and separate statements that:
- Provide the necessary information and amounts to enable the buyer to take into account the credits for the eligible credit property
- Verify that the parties are not related
- Include a representation from the seller that it has complied with all relevant requirements to make a transfer election and provided the required minimum documentation to the buyer.
When a taxpayer is making a transfer election for an ITC, they must include their appointed registration number on their annual return and have their own Employer Identification Number (EIN). Once the transaction is complete, an election to transfer an eligible credit is irrevocable.
What Does This Mean for Renewable Energy Project Developers?
The launch of the free IRA Pre-Filing Registration Tool marks an important breakthrough for developers interested in the renewable energy ITC market because it allows them to register their intention to make a transfer election or use direct pay and procure pre-registration numbers for their tax credits. For buyers, it provides the knowledge that the project in which they’re interested in purchasing meets the guidelines for registering with the IRS.
Per IRA guidelines, developers are required to register their projects for IRS review to make a transfer election or use direct pay. But, IRS regulations often are complex — and confusing — for a lot of individuals and business owners. That’s a key reason the agency released a user guide and tutorial video about the pre-filing registration tool — to give applicable entities a clear sense of what to expect.
The IRS user guide provides developers with all the information necessary to complete a registration. It also covers ITC-specific requirements and includes a non-exhaustive list of documents.
What are Some of the Guidelines for the Pre-File Registration Process?
Probably the biggest rule for developers engaging in the ITC transfer process is that their projects must be placed in-service before they complete their pre-filing registration. Another stipulation is that they need a separate registration number for each of their properties or facilities.
and include the registration number on their annual tax return as part of making a valid election. They also must calculate and report the credit on the applicable source credit form and IRS Form 3800.
How Long Does It Take for the IRS to Issue a Registration Number?
The ITC credit transfer registration cannot be completed until the beginning of the tax year in which it will be earned. That doesn’t mean you should take your time completing the registration process, though. The IRS recommends that applicable entities register “as soon as reasonably practicable” during the tax year of the ITC.
Before a developer or other applicable entity receives an ITC transfer registration number, the IRS reviews their case, a process that can take as long as 120 days — and that’s without delays based on registrant submission mistakes. Once you submit your registration, it is closed for any additions, updates or amendments.
Submissions may only be revised when the IRS review is complete and the registration declaration is returned. Also, it’s important to note that just because a developer receives a registration number doesn’t mean they qualify for any specific credit amount.
Our expert team at REOX manages the seamless transfer of tax credits from clean energy developers to C-Corp buyers and offers optional bridge loan financing for sellers, thereby expediting fund exchange. Once your transaction is complete, we provide post-transaction support, from follow-up documentation and reporting to assistance with potential future transactions. Contact us today to learn more!
