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IRS, Treasury finalize rules on clean energy tax credit transfers

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The Internal Revenue Service and the Treasury Department released final regulations Thursday on the transfer of clean energy manufacturing, investment and production tax credits, with specific rules for partnerships and S corporations. 

The rules aim to increase investment in clean energy technologies by making tax incentives transferable between project developers and investors. The Inflation Reduction Act created two new credit delivery mechanisms — elective pay (otherwise known as “direct pay”) and transferability — that allow state, local and tribal governments; nonprofit organizations; Puerto Rico and other U.S. territories; and other businesses to leverage clean energy tax credits. Until the Inflation Reduction Act introduced these new credit delivery mechanisms, governments, many types of tax-exempt organizations, and many businesses couldn’t fully utilize tax credits like those that incentivize clean energy construction. The 2022 law has spurred development of energy tax credit exchanges. Some of the incentives were already available to businesses under the CHIPS and Science Act of 2022.

“The Inflation Reduction Act’s new tools to access clean energy tax credits are a catalyst for meeting President Biden’s historic economic and climate goals,” said Treasury Secretary Janet Yellen in a statement. “They are acting as a force multiplier, enabling companies to realize far greater value from incentives to deploy new clean power and manufacture clean energy components. More clean energy projects are being built quickly and affordably, and more communities are benefitting from the growth of the clean energy economy.”

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Janet Yellen, U.S. Treasury secretary, speaks during a news conference at the Treasury Department in Washington, D.C.

Ting Shen/Bloomberg

The Inflation Reduction Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act allow taxpayers to take advantage of some of manufacturing investment, clean energy investment and production tax credits through elective pay or transfer provisions. For tax years starting after Dec. 31, 2022, eligible taxpayers can opt to transfer all or part of eligible credits to unrelated taxpayers for cash payments.

The unrelated taxpayers are then permitted to claim the transferred credits on their tax returns. The cash payments aren’t included in gross income of the eligible taxpayers and aren’t deductible by the unrelated taxpayers. 

The final regs also include special rules related to excessive credit transfers and recapture events, including rules for determining whether an event has occurred, the resulting tax impact and the person responsible for that tax impact.  

The final regulations also provide rules for a mandatory IRS pre-filing registration process through an electronic portal. The pre-filing registration process needs to be completed, and a registration number received, before making an election to transfer eligible credits. In addition, the final regulations describe specific rules for partnerships and S corporations as eligible taxpayers and transferee taxpayers. 

The Inflation Reduction Act’s transferability provisions allow businesses to transfer all or part any of 11 clean energy credits to a third-party in exchange for tax-free immediate funds, so businesses can take advantage of tax incentives if they don’t have sufficient tax liability to fully utilize the credits themselves. Entities without sufficient tax liability were previously unable to realize the full value of credits, which raised costs and created challenges for financing projects.

The Inflation Reduction Act also allows tax-exempt and governmental entities to receive elective payments for 12 clean energy tax credits, including the major investment and production tax credits, along with tax credits for electric vehicles and charging stations. Businesses can also choose elective pay for a five-year period for three of those credits: the credits for advanced manufacturing (45X), carbon oxide sequestration (45Q), and clean hydrogen (45V).  Final rules on elective pay were issued in March.

To help taxpayers with transferring a clean energy credit or receiving a direct payment of an energy credit or CHIPS credit, the IRS built IRS Energy Credits Online (ECO) for taxpayers to complete the pre-file registration process and receive a registration number. The registration number needs to be included on the taxpayer’s annual return when making a transfer election or elective payment election for a clean energy credit. The registration process helps deter improper payments to fraudsters and gives the IRS basic information so any taxpayer that qualifies for these credit monetization mechanisms can access these benefits when filing a return and making an election.

Previously, the IRS issued proposed regulations for the transfer of applicable credits and temporary regulations for the mandatory IRS pre-filing registration process. For detailed instructions on how to use the tool, refer to Publication 5884, Inflation Reduction Act (IRA) and CHIPS Act of 2022 Pre-Filing Registration Tool. The IRS also updated the frequently asked questions based on the final regulations. More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.

As of April 19, over 900 entities have requested around 59,000 registration numbers for projects or facilities located across all 50 states plus territories. Approximately 97% of these projects are pursuing transferability.  A wide variety of credits are being used, but most of the transferability-related registrations are related to solar and wind projects using the investment or production tax credit. More than 1,300 projects or facilities submitted are pursuing the elective pay mechanism, including submissions from more than 75 state and local governments to register approximately 650 clean buses and vehicles through elective pay.   

The value of the tax credits for such projects isn’t determined during the pre-filing registration process but instead is determined after an entity files their tax return. 

The number of registration number requests so far does not include cases where an entity has not yet formally requested a registration number, including those who may have work saved in progress in IRS ECO. Registration numbers, which accelerate return processing and help prevent improper payments, are being issued on a rolling basis.  The IRS has already issued approximately 40,000 registration numbers.

Crux, a sustainable finance technology company that has been helping with transfers of clean energy tax credits, pointed out in an email that the final guidance largely affirms last June’s proposed transferability guidance. The proposed rules already clarified and supported tax credit transfer deals, which have seen significant growth in the market to an estimated $9 billion since June 2023. The Treasury declined to change some of the rules related to passive and active tax liabilities for individuals and S-corporations. The requirement that tax credits are sold in vertical, not horizontal, slices is also retained.

The IRS confirmed in the final regulations that there are no restrictions on the ability of project owners to obtain loans — either from a tax credit buyer or a third party lender — secured by a tax credit sale agreement. The IRS reiterated that companies must get a pre-filing registration number in order to complete a tax credit transfer. While more than 45,000 projects have already submitted pre-registration filings, some commenters noted specific challenges faced by smaller projects, so technology will be crucial in streamlining this process.

“While a multiyear market for transferable tax credits is already well underway, the final guidance released today gives further clarity on this key tool for financing clean energy and manufacturing here in the U.S.,” said Crux CEO Alfred Johnson in a statement. “With these final rules set, we expect to see the market continue to accelerate rapidly.”

Crux currently works with over 100 partners and has over $8 billion in transferable tax credits listed on its platform.

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Accounting

In the blogs: Higher questions

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Valuations this year; handling interviewees; AI and accounting ed.; and other highlights from our favorite tax bloggers.

Higher questions

Haunting of the Hill House

  • Eide Bailly (https://www.eidebailly.com/taxblog): The House Ways and Means Committee planned to begin to publicly debate and amend tax legislation on May 13, with the ultimate goal to produce the “one big, beautiful” bill to extend the Tax Cuts and Jobs Act: “This is the stage where seemingly dead and buried ideas mysteriously come back to life to haunt the proceedings.” 
  • Wiss (https://wiss.com/insights/read/): Key highlights of the proposed beauty.
  • Current Federal Tax Developments (https://www.currentfederaltaxdevelopments.com/): And a bulleted summary.
  • Tax Vox (https://www.taxpolicycenter.org/taxvox): If Congress expands the Child Tax Credit with TCJA extension, who might benefit and what might it cost?
  • Tax Foundation (www.taxfoundation.org/blog): Policymakers will also decide the fate of the SALT cap. Debate rages about making the cap more generous, along with possible limits on pass-through workarounds and SALT deductions  by corporations. While capping business SALT could raise additional revenue, it would risk slowing economic growth.

Soft skills

Rational decisions

Tidying up

  • Boyum & Barenscheer (https://www.myboyum.com/blog/): Should you vacuum the meeting room? How many times should you talk with a candidate? Keys — some often overlooked — to effective interviewing.
  • The National Association of Tax Professionals (https://blog.natptax.com/): A WISP is the written information security plan that verifies how your firm protects taxpayer information. You can’t ignore them anymore, and here’s how to build a compliant one.
  • Taxing Subjects (https://www.drakesoftware.com/blog): An outstanding guide to SEO for accounting firms. 
  • AICPA & CIMA Insights (https://www.aicpa-cima.com/blog): Where does AI fit into accounting education? Everywhere.

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Accounting

House committee marks up tax reconciliation bill

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The House Ways and Means Committee held a hearing Tuesday to mark up the so-called “one, big beautiful bill” extending the expiring provisions of the Tax Cuts and Jobs Act while adding other tax breaks for tip income, overtime pay and Social Security income and eliminating tax credits from the Inflation Reduction Act for renewable energy as well as the Direct File and Free File programs.

“Today, this Committee will move forward on President Trump’s promise of delivering historic tax relief to working families, farmers and small businesses,” said committee chair Jason Smith, R-Missouri, in his opening statement. “The One Big Beautiful Bill is the key to making America great again. This moment has been years in the making. While Democrats were defending IRS audits on the middle class and tax carveouts for the wealthy, Republicans on this Committee got on the road, to hear from real Americans about how the 2017 tax cuts benefited them. This bill wasn’t drafted by special interests or K Street lobbyists. It was drafted by the American people in communities across the country.”

Democrats blasted the bill. “In 2017, Republicans passed a tax law that was supposed to pay for itself, raise wages, and help working families,” said ranking member Richard Neal, D-Massachusetts. “None of that happened. Instead, it exploded the deficit, worsened inequality, and left everyday Americans behind. Now they want to double down on the same failed playbook. One that rigs the system for billionaires and big corporations while everyone else pays the price.”

Among the provisions, the bill would make the expiring rate and bracket changes of the TCJA permanent and increase the inflation adjustment for all brackets excluding the 37% threshold, according to a summary from the Tax Foundation. The bill would also make the expiring standard deduction levels permanent and temporarily increase the standard deduction by $2,000 for joint filers, $1,500 for head of household filers and $1,000 for all other filers from 2025 through the end of 2028. It would also make the personal exemption elimination permanent, and make the $750,000 limitation and the exclusion of interest on home equity loans for the home mortgage interest deduction permanent. It would also make the state and local tax deduction cap, also known as the SALT cap, permanent at a higher threshold of $30,000, phasing down to $10,000 at a rate of 20% starting at modified adjusted gross income of $200,000 for single filers and $400,000 for joint filers.

Other changes and limitations to itemized deductions would be made permanent, including the limitation on personal casualty losses and wagering losses and termination of miscellaneous itemized deductions, Pease limitation on itemized deductions, and certain moving expenses.

The bill is likely to go through some changes when it goes to the Senate. “Politically, we’ve been talking about the process for the last couple months,” said Mark Baran, managing director at CBIZ’s national tax office. “Congress is finally able to pass a concurrent resolution to unlock the budget reconciliation process.”

“The House and the Senate have completely different instructions on what they’re going to cut and how they’re going to score,” he added. “Some of that’s very controversial, and that needs to be worked out. But now we’re getting into the actual crafting of provisions and legislation.”

According to a summary on the CBIZ site, the bill would make permanent and increase the Section 199A pass-through entity deduction from 20% to 23%, also known as the qualified business income, or QBI, deduction. The bill includes provisions that open the door for pass-through entity owners in specified service industries to use the deduction. It would also extend current deductions for research and experimental expenses through Dec. 31, 2029, and extend 100% bonus depreciation through that same date.

The bill would also allow businesses to include amortization and depreciation when figuring the business interest limitation through Dec. 31, 2029, while making permanent the excess business loss limitation.

In addition, the bill would retroactively terminate the Employee Retention Tax Credit for taxpayers who filed refund claims after Jan. 31, 2024. 

In keeping with Trump campaign promises, the bill would eliminate taxes on tips for employees in certain defined industries where tipping has been a traditional form of compensation. There would be a new $4,000 deduction for seniors that phases out starting at $75,000 of income. The bill would also eliminate taxes on overtime pay.

The bill would give individuals an above-the-line deduction for interest on loans used to purchase American-made cars, but that would be capped at $10,000 with income phaseouts starting at $100,000 (single) and $200,000 (married filing jointly).

The bill would also increase taxes on certain private college investment income up to a maximum of 21% on universities with a student-adjusted endowment above $2 million.

It would also roll back some of the renewable energy provisions from the Inflation Reduction, including a phaseout and restrictions on clean energy facilities starting in 2029, while also limiting or eliminating clean housing energy and vehicle credits. The bill would sunset major IRA clean electricity tax credits, including the clean electricity production tax credit (45Y), clean electricity investment tax credit (48E), and nuclear electricity production tax credit (45U) begin phasing out after 2028 and finish phasing out by the end of 2031; repeal hydrogen production credit (45V) for facilities beginning construction after 2025, according to the Tax Foundation. It would also phase out advanced manufacturing production credit (45X) for wind energy components after 2027, for all other eligible components after 2031. Across several IRA clean energy credits, the bill would repeal transferability after the end of 2027 and further limit credits based on involvement of foreign entities of concern. On the other hand, it would expand the clean fuel production credit (45K), and tighten rules on the 126(m) limitation for executive compensation.

The bill would terminate the current Direct File program at the Internal Revenue Service and establish a public-private partnership between the IRS and private sector tax preparation services to offer free tax filing, replacing both the existing Direct File and Free File programs.  

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Accounting

FASAB mulls accounting impact of federal reorganization

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The Federal Accounting Standards Advisory Board is asking for input on emerging accounting issues and questions related to reporting entity reorganizations and abolishments as the federal government endures wide-ranging layoffs and reductions in force, including the elimination of entire agencies by the Elon Musk-led Department of Government Efficiency.

“Federal agencies and their functions, from time to time, have been reorganized and abolished,” said FASAB in its request for information and comment

Reorganization refers to a transfer, consolidation, coordination, authorization or abolition of one (or more) agency or agencies or a part of their functions. Abolition is a type of reorganization and refers to the whole or part of an agency that does not have, upon the effective date of the reorganization, any functions.

The Trump administration has recently moved to all but eliminate parts of the federal government such as the U.S. Agency for International Development and the Consumer Financial Protection Bureau, and earlier this month, Republicans on the House Financial Services Committee passed a bill that would transfer the responsibilities of the Public Company Accounting Oversight Board to the Securities and Exchange Commission. 

FASAB issues federal financial accounting standards and provides timely guidance. Practitioner responses to the request for information will support its efforts to identify, research and respond to emerging accounting and reporting issues related to reorganization and abolishment activities, such as transfers of assets and liabilities among federal reporting entities. The input will be used to help inform any potential staff recommendations and alternatives for FASAB to consider regarding short- and long-term actions and updates to federal accounting standards and guidance in this area.

The questions include:

  1. Have any recent or ongoing reorganization activities or events affected the scope of functions, assets, liabilities, net position, revenues, and expenses assigned to your reporting entity (or, for auditors, your auditees)? If so, please describe.
  2. What accounting issues have you (or your auditees) encountered (or do you anticipate) in connection with recent or potential reorganization activities and events?
  3. Please describe the sources of standards and guidance that you (or your auditees) are applying to recent, ongoing, or pending reorganization activities and events.
  4. Have you experienced any difficulties or identified gaps in the accounting and disclosure standards for reorganization activities and events? What potential improvements would you recommend, if any?

FASAB is asking for responses by July 15, 2025, but acknowledged that late or follow-up submissions may be necessary given the provisional nature of the request. Responses should be emailed to [email protected] with “RERA RFI response” on the subject line.

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