The Inflation Reduction Act of 2022 (IRA) expanded and modified numerous tax credits and incentives supporting the renewable energy supply chain. The incentive to pursue such qualifying activities would have been tempered for any taxpayers without sizable income tax liabilities at the time of the credit-generating activity. Fortunately, the IRA also established a transferability program through which applicable credits can be sold to buyers for cash. Such sales provide accelerated cash benefits — irrespective of the taxpayer’s expected tax liability. The situation is more complex for taxpayers wishing to purchase qualifying credits through this sale regime. To that end, intended buyers must weigh both the costs and benefits of credit purchases and conduct proper due diligence prior to completing a transaction.
Changes made to Inflation Reduction Act tax credits by the One, Big, Beautiful Bill
While the One, Big, Beautiful Bill (OBBB), enacted on July 4, 2025, made several changes to energy credits from the IRA — particularly solar and wind — credit transferability still remains an option for those who want to purchase credits. Most of the changes in the OBBB relate to acceleration of the expiration of certain credits, so taxpayers looking to buy credits need to pay extra attention to confirm that energy projects generating the credits for sale meet the stringent dates set forth in the OBBB.
Considerations surrounding the purchase of energy tax credits
Historically, federal income tax credits, similar to those modified by the IRA, have been claimed as general business credits under Section 38. Such credits would offset a majority of the taxpayer’s current year tax liability, and the excess was subject to carryback and carryforward rules. That regime applied to both C corporations and individual taxpayers that either directly generated such credits or received allocations of credits from pass-through entities.
If the entity wants to directly monetize the tax benefit as quickly as possible, the IRA provisions allow entities that generate energy tax credits to sell those credits to other taxpayers. Depending on the type and size of the credit, purchasers can expect to buy $1 of credit for prices ranging from 85 to 95 cents.
So, what would stop a purchaser from snapping up a $1 million credit against its 2025 taxes for $850,000? There are several factors a tax credit purchaser must consider. In some cases, tax rules may limit the buyer’s ability to claim the full amount of the credit. Even if the purchaser can use the credit, the buyer takes on certain risks that could cause problems in the future, such as the risk of disallowance if the IRS later determines that the original seller was not entitled to the credit claimed. These potential challenges are discussed in more detail below.
Who can purchase an Inflation Reduction Act energy tax credit?
On first glance, many types of taxpayers are eligible to purchase these IRA energy tax credits. Eligible purchasers include:
- Individuals purchasing credits directly to offset individual income (passive activity rules apply).
- Partnerships or S corporations (tax credit flows to owners; passive activity rules apply).
- Widely held C corporations.
- Closely held corporations (applies to active or passive income but not portfolio income).
The first important question any would-be purchaser needs to answer is, “Will I be able to actually offset my tax liability if I do purchase the credit?” The critical consideration at this point is the caveat noted above about passive activity rules. In general, when a credit is transferred, the purchaser is buying a general business credit that’s subject to the passive activity rules of Section 469. The result is the classification of the purchased credits as passive activity credits, and the purchaser can only use the transferred credits to offset passive income — not active or portfolio income.
Given this first major hurdle, the list of all eligible purchasers can be narrowed down to the following groups of taxpayers who are most likely to benefit from buying tax credits:
- Widely held corporations (can utilize tax credits with the least amount of restriction).
- Closely held C corporations (can use credits to offset tax on active or passive income, but not portfolio income).
- Individuals with significant passive income.
Even taxpayers who fit one of these profiles may not be able to actually use all of their purchased credits right away. General business credits can offset up to 75% of the buyer’s net income tax liability. This is calculated as the buyer’s net income tax less the greater of tentative minimum tax or 25% of the excess of net regular tax liability over $25,000. Credits that aren’t able to be used based on this limitation are subject to carryback and carryforward rules to be used in a different tax year.
What else should IRA energy tax credit buyers consider?
The risks associated with a transfer of these credits have led potential buyers to apply a robust diligence process before closing on the purchase of a credit, similar to an M&A deal. Credit purchase and sale transactions regularly include an initial letter of intent phase, due diligence, final negotiation, closing, and continuing obligations of the seller to comply with representations and warranties.
Ultimately, buyers assume the risk that the IRS could disallow the underlying credit and therefore must complete sound diligence to ensure the credit is defendable and the price of the credit reflects the risk. Furthermore, there is a five-year holding period required for property giving rise to the credits. If a seller disposes of the property during that time, the buyer could be on the hook for recapture. For these reasons, tax insurance is becoming a preferred option to provide a safety net that protects against any potential problems that went undetected during due diligence.
In addition to the problems that can arise after the transaction, buyers and their tax advisors need to be mindful of several key tax rules that apply to taxpayers who purchase transferred credits. Some of these potential pitfalls include:
- Income isn’t recognized on the discount of the sale price (i.e., buying a $100 credit for $90 doesn’t create $10 of income to the buyer).
- Under the general business credit rules, a three-year carryback and a 20-year carryforward will apply to excess purchased credits.
- Elections are irrevocable once made.
- No deduction can be taken for the amount paid to purchase the credit, as the purchase price of the credit is effectively treated like the payment of a tax.
- The seller must complete prefiling registration with the IRS (recommended 120 days before filing), and this number must be attached to both seller’s and buyer’s returns.
- The credit MUST be claimed on timely, original filed returns. Final regulations allow for claims to be made on superseded returns filed prior to the extended due date, but no purchased credits can be claimed on amended returns.
When is purchasing an IRA energy credit a good idea?
The opportunity to buy and sell IRA energy tax credits has generally been welcomed as a helpful benefit, but pitfalls may exist for taxpayers who want to take advantage of these tax credit deals. Any credit transaction will involve several support services (e.g., credit studies, cost segregation analyses, tax insurance, due diligence examinations), so buyers and sellers must consider these costs of complexity when negotiating a credit transfer. For now, energy tax credit purchases have typically started to make financial sense for the purchaser when they generated at least $500,000 in discount to cover diligence, insurance, legal, accounting, brokerage commissions, and profit for the buyer. That threshold could decrease as time goes on and the services that support the transactions become more routine.
Any taxpayer considering buying IRA energy tax credits will need to undertake a thorough cost-benefit analysis that focuses on their individual facts and circumstances to determine if buying credits is a good strategy for them.
