Reprinted from Tax Notes State, April 15, 2024

To incentivize investment in clean or renewable energy, the Inflation Reduction Act of 2022 (IRA) created — and in some cases improved on existing — federal income tax credits availablemto investors in eligible clean or renewable energy projects. Some of these credits are popular, at least in part, because they are transferable, meaning that they can be sold by the entity generating the credits. This transferability allows entities that do not expect to use the credits to monetize them by selling all or a portion of the credits to a thirdparty purchaser.

To fuel the market for IRA credits, proposed Treasury regulations provide that the purchaser will not recognize gain on its use of the credit for federal income tax purposes (which is not the case for all credits). However, in the weeds of state tax there is a trap for the unwary: Not all states will follow this federal relief provision, and some states may try to tax gain on the use of a purchased IRA credit.

Click here to continue reading on IRA credits in Tax Notes State.