Understanding Direct Pay vs Transferability of Tax Incentives
Refundable Tax Incentives
Direct Pay refundable tax incentives are a type of tax credit that can be converted into a cash payment from the IRS if the taxpayer has overpaid its taxes. This option is available for certain renewable energy and carbon capture projects under the Inflation Reduction Act. Tax-exempt entities such as non-profits can benefit from this option as they do not have enough tax liability to use the tax credits.
An example of a Direct Pay refundable tax incentive is the Section 48 Investment Tax Credit for non-profits. This credit is available to tax-exempt entities who can receive a payment of up to 30 percent of the cost of renewable energy projects.
Transferable Tax Incentives
Transferable tax incentives are a type of tax credit that can be sold or transferred to another taxpayer who can use them to offset their tax liability. This option is also available for certain renewable energy and carbon capture projects under the Inflation Reduction Act. Transferable tax credits can help taxpayers monetize their tax benefits and generate cash flow.
An example of a transferable tax incentive is the Section 179D tax deduction of up to $5.00 per square foot for energy efficiency projects. For non-profits, this deduction can be sold or transferred to the designer of the project, who can use it to reduce their tax liability.
Another example of a transferable tax incentive is the Section 48 Investment Tax Credit for commercial companies, who are not eligible for Direct Pay (only non-profits are eligible). The 30% ITC can be sold or transferred to ANY 3rd party, one time, who can then use it to reduce their tax liability.
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