In June 2023, the Treasury Department and the IRS issued long-awaited proposed regulations addressing transfers of green energy tax credits under the Inflation Reduction Act (IRA).
Prior to the IRA, a REIT typically held solar projects through a taxable REIT subsidiary and could not benefit from these credits without paying corporate tax. The transferability feature under the IRA allows a REIT to monetize these credits simply by selling the credits to an unrelated buyer for cash without the need to use a taxable REIT subsidiary or other structuring solutions.
In the preamble to the proposed regulations, the Treasury Department and the IRS addressed several questions that had been posed by REIT stakeholders. In particular, the Treasury Department and the IRS confirmed that they do not believe that a prohibited transaction tax arises from the transfer of the tax credits. In addition, the Treasury Department and the IRS confirmed that the receipt of or the right to receive a tax credit does not result in gross income to a REIT.
These helpful clarifications will provide REITs with greater certainty in their green energy investments. For a more detailed discussion of the non-REIT specific aspects of the proposed regulations, please see DLA Piper’s prior alert, IRS releases proposed regulations on transferring certain renewable energy credits.
This alert provides a general overview of the REIT tax guidance as well as some related practical observations.