Baker Tilly’s Insights on the IRS Releasing Final Regulations for Section 6418

NORTHAMPTON, MA / ACCESSWIRE / May 14, 2024 / Baker Tilly
Clarifying Tax Credit Transfers

Originally published by Baker Tilly

Authored by Robert Moczulewski, Jeronimo Aldrete

On April 30, 2024, the Treasury Department and the IRS released the final regulations for section 6418, detailed in the Federal Register. These regulations are designed to clarify how the elective transfer of tax credits under section 6418 should be implemented.

General rules and definitions

The general rules and definitions for the proposed section 1.6418-1 outlined the guidelines for transferring eligible tax credits. Any definitions that did not receive specific feedback from commenters during the consultation process were adopted as initially proposed in this Treasury decision.

Eligible taxpayer

Section 6418(f)(2) of the Internal Revenue Code defines an "eligible taxpayer" as any taxpayer not specifically excluded under section 6417(d)(1)(A), encompassing individuals and entities subject to any U.S. internal revenue tax, whether they have an income tax obligation or not. The regulations solidify this definition, rejecting proposals to include taxpayers solely under U.S. territory taxation, thereby aligning closely with the traditional definition provided in section 7701(a)(14). Moreover, clarifications about partnerships partly owned by "applicable entities" confirm that such partnerships qualify as eligible taxpayers if they haven't elected to be treated as applicable under certain credits like sections 45Q, 45V or 45X. These partnerships are thus entitled to transfer the full number of eligible credits linked to their owned properties, though limitations may apply if partners are tax-exempt or government entities.

Eligible credit property

Section 6418(a) allows eligible taxpayers to elect to transfer all or specified portions of an eligible credit associated with any of their eligible credit properties for any taxable year. The term "eligible credit property" is defined as the unit of property owned by an eligible taxpayer from which the amount of an eligible credit is derived, according to proposed section 1.6418-1(d). This definition is crucial as it identifies the specific properties that can generate transferable tax credits. Proposed sections 1.6418-1(d)(1) through (11) specify what constitutes an eligible credit property for each of the 11 eligible credits, aligning each property type with the corresponding tax credit provision, such as energy properties under section 48 or qualified facilities under section 45. These details ensure that the rules for registration and election for credit transfer are tightly coupled with the inherent requirements of each eligible credit type.