Menu
Close
Transferable tax credits are a type of tax incentive that allows the taxpayer who earns the tax credit to sell it to a third party. In the United States, transferable tax credits exist at both the state and federal levels.
A tax credit allows an individual or business to apply the amount of the credit to their tax bill, to reduce their tax liability—the amount they have to pay to a government tax agency. Tax credits are a mechanism that policymakers use to incentivize certain investments and behaviors.
For most tax credits, the individual or entity who qualifies for the credit is the one who claims it on their tax return. Transferable tax credits are different: Taxpayers who are eligible to claim transferable credits are able to sell them to a third party who wishes to reduce their tax liability.
Typically, a buyer purchases tax credits at a discount. For example, a buyer of $100,000 in transferable tax credits may agree to purchase the credits for 80 cents on the dollar. This means they pay $80,000 for credits that enable them to claim a $100,000 deduction, resulting in a margin of $20,000 on the transaction, not including any related transaction costs.
Policymakers make certain tax credits transferable because the taxpayer who becomes eligible for the credit may not have sufficient tax liability to claim the entire credit, or to claim it at all.
For example, Pennsylvania has a film tax credit program that allows film producers to claim a tax credit equivalent to 25% of a film’s production costs if at least 60% of the film’s total expenses were incurred in Pennsylvania. If the production company’s state tax liability is less than than 25% of the film’s costs, then it makes sense to sell their tax credit to a third-party investor.
Many U.S. states have issued transferable tax credits to more effectively promote certain types of economic development. The Pennsylvania film tax credit, for example, is meant to encourage more film production in the state. Across the U.S., transferable tax credits incentivize a wide array of activities, including:
At the federal level, transferable tax credits largely pertain to clean energy production and storage.
The Inflation Reduction Act (IRA) of 2022 introduced a number of new transferable tax credits aimed at advancing the Biden Administration’s climate goals. IRA transferable tax credits include 11 different tax credits grouped into two categories: the investment tax credit (ITC) and the production tax credit (PTC).
The clean energy investment tax credit provides a tax credit to owners of clean energy installations intended to defray the costs of initial construction. For projects placed in service starting in 2025, the tax credit is for: 6% of the qualified investment cost basis, or 30% if the project’s construction meets prevailing wage requirements.
The clean energy production tax credit provides a tax credit based on the amount of renewable energy produced by a project placed in service by a certain date. For projects placed in service starting in 2025, owners of renewable energy installations can claim or sell a tax credit of 0.3 cents per kilowatt hour (kWh) or 1.5 cents/kWh if the project’s construction meets prevailing wage requirements.
Evergrow helps clean-energy project developers, REITs, and investors buy and sell clean energy tax credits.
To learn more, click the Get Started button to get in touch with a member of our team.