Tax Credits You Can Sell, or Get Paid in Cash: Sections 6417 and 6418 Open a New Market

Two new paths to monetize a credit

The Inflation Reduction Act (IRA), Pub. L. 117-169, added two monetization mechanisms in § 13801, effective for taxable years beginning after December 31, 2022.

The first is elective payment, often called direct pay, under IRC § 6417. The second is transferability under IRC § 6418. They are not alternatives a single taxpayer freely chooses between — which one applies depends on who the taxpayer is.

On June 14, 2023, Treasury and the IRS released guidance implementing both, published in the Federal Register on June 21, 2023: proposed regulations for § 6417 (REG-101607-23) and for § 6418 (REG-101610-23), together with temporary regulations on pre-filing registration (T.D. 9975).

Direct pay: turning a credit into a refund

Section 6417 lets an applicable entity treat certain clean-energy credits as a payment of federal income tax. Because the entity often has little or no tax liability, the result is effectively a cash refund equal to the credit.

The category of applicable entities is defined and finite. It includes tax-exempt organizations, state and local governments, Indian tribal governments, the Tennessee Valley Authority, rural electric cooperatives, and Alaska Native Corporations. For these entities, a credit that was historically worthless — because there was no tax to offset — becomes a source of cash.

For-profit taxpayers generally cannot use direct pay. There are three exceptions, and only three: the § 45V clean hydrogen credit, the § 45Q carbon-sequestration credit, and the § 45X advanced-manufacturing credit. For those, a for-profit taxpayer may elect direct pay for a five-year period. Outside those three, a for-profit business that wants cash for its credits looks to transferability instead.

Transferability: selling a credit you cannot use

Section 6418 lets an eligible taxpayer — generally one not eligible for direct pay — sell all or part of an eligible credit to an unrelated third party. The mechanics are precise, and each rule matters.

The consideration must be paid in cash. The cash is not included in the seller's gross income, and it is not deductible by the buyer. A credit may be transferred only once; the buyer cannot resell it. And the buyer must be unrelated to the seller.

The effect is a new financial instrument. A developer that generates more credit than it can use no longer has to find a tax-equity partner through a complex structured transaction. It can sell the credit for cash, and the buyer steps into the credit position. This is the change most likely to reshape how clean-energy projects are financed.

The credits that can be monetized

Both mechanisms apply to a defined list of IRA clean-energy credits, including the production and investment credits under §§ 45, 45Y, 48, and 48E, the § 45Q carbon-sequestration credit, the § 45V hydrogen credit, the § 45X advanced-manufacturing credit, and the § 48C advanced-energy-project credit, among others.

The two lists are nearly identical but not perfectly so, and the difference is the kind of detail that determines whether a transaction works. The § 45W commercial clean-vehicle credit, for example, is available for direct pay by certain tax-exempt entities but is not transferable. A taxpayer planning to sell a particular credit should confirm that credit is on the transferability list, not merely that it is an IRA credit.

The step that is easy to miss: mandatory pre-filing registration

The most operationally important feature of the June 2023 guidance is a gating requirement. Before making either election, a taxpayer must complete a pre-filing registration with the IRS through an electronic portal and receive a registration number. A separate registration number is required for each credit property.

The registration number must be reported on the return that makes the election. An election made without a valid registration number is not effective — the payment is denied, or the transfer fails. Registration is not a formality that can be handled after the fact. It is a prerequisite, and it sits on the critical path.

As of mid-2023, the registration portal had not yet opened. Treasury indicated it expected the portal to open in the fall. That timing is itself a planning fact: a taxpayer intending to monetize a credit for the current year should be prepared to register as soon as the portal is available, because the registration has to precede the filing, and the filing has its own deadline.

What this means in practice

Direct pay and transferability remove the largest historical barrier to the value of clean-energy credits — the need for the credit holder to have tax liability. For a tax-exempt sponsor, the question is whether it qualifies as an applicable entity and which credits it can claim as cash. For a for-profit developer, the question is whether to use, transfer, or — for the three eligible credits — elect direct pay, and how to price a credit sale. For both, the threshold operational task is the same: plan for pre-filing registration early, because no election is valid without it. We will revisit these rules as the registration portal opens and final regulations are issued.

Key takeaways

• The Inflation Reduction Act (§ 13801) created two ways to monetize clean-energy credits, effective for tax years beginning after December 31, 2022.
• Direct pay under IRC § 6417 lets applicable entities — tax-exempt organizations, governments, tribes, the TVA, rural cooperatives, and Alaska Native Corporations — receive certain credits as cash.
• For-profit taxpayers generally cannot use direct pay, except for the § 45V, § 45Q, and § 45X credits, for which they may elect it for five years.
• Transferability under IRC § 6418 lets eligible taxpayers sell credits to unrelated buyers for cash; the cash is tax-free to the seller, nondeductible to the buyer, and the credit may be sold only once.
• Both elections require mandatory pre-filing registration through an IRS portal — a separate number per credit property — before the return is filed.

Frequently asked questions

What is the difference between direct pay and transferability?

Direct pay under § 6417 lets eligible tax-exempt and governmental entities receive certain credits as a cash refund. Transferability under § 6418 lets for-profit taxpayers who cannot use a credit sell it to an unrelated buyer for cash. Which one applies depends on the type of taxpayer.

Can a for-profit company use direct pay?

Generally no. For-profit taxpayers can elect direct pay only for the § 45V clean hydrogen, § 45Q carbon-sequestration, and § 45X advanced-manufacturing credits, and only for a five-year period. For other credits, a for-profit business uses transferability instead.

Is the cash from selling a credit taxable?

The cash a seller receives for an eligible credit under § 6418 is not included in the seller's gross income, and the buyer cannot deduct it. The credit may be transferred only once.

What is the registration requirement?

Before making either election, a taxpayer must register with the IRS through an electronic portal and obtain a registration number for each credit property, then report that number on the return. An election without a valid registration number is not effective.