Transferable Solar Tax Credits (Section 6418): How Buying Credits Cuts Your Tax Bill
Section 6418 lets taxpayers buy clean energy tax credits at a discount to reduce federal tax. How credit transfers work, pricing, risks, and the passive-activity limit for individual buyers.
Last reviewed by Lenny Whiting, attorney (NV, UT) and CPA (NV)
Short answer: a transferable tax credit lets you buy another company's clean energy tax credit for less than face value and use it to pay your own federal income tax. If you buy $100,000 of solar credits at 90 cents, you pay $90,000 and reduce your tax by $100,000. That's a $10,000 saving, usually realized within months.
How do transferable solar tax credits work?
- A project owner places a qualifying solar project in service and earns a credit, for example under Section 48E.
- The seller registers the project with the IRS through its pre-filing registration process and receives a registration number.
- The buyer and seller sign a transfer agreement, and the buyer pays cash.
- Both parties file Form 3800 with their returns, with the transfer election statement attached.
- The buyer uses the credit in its tax year that includes the end of the seller's tax year, and can factor the expected credit into estimated tax payments.
Who should consider buying credits?
| Buyer type | Fit |
|---|---|
| C corporations (widely held) | Strong: credits offset regular corporate tax, subject to the general business credit limit |
| Individuals with significant passive income | Possible: credits offset only the tax on passive income (rental real estate, passive K-1s) |
| Individuals with mostly W-2 or active business income | Weak: passive limits usually block use. Owning a project for your own business may fit better |
Why the passive activity rule matters for high earners
Many high-income professionals assume they can buy credits to wipe out tax on salary or practice income. Under Treasury's final regulations, an individual buyer is treated as not materially participating in the project, so the purchased credit is passive. It can reduce only the federal tax on passive income, and any excess is suspended and carried forward. For W-2 earners and active business owners, installing solar for their own operating business is often the better route. See the commercial solar tax credit guide.
What diligence should a buyer do?
- Confirm the project's placed-in-service date, and that it meets the 2027 deadline or the begin-construction safe harbor.
- Review the support for the credit rate: system size, prevailing wage and apprenticeship records, and any bonus claims.
- Check the foreign-entity (FEOC) compliance documentation for projects begun after 2025.
- Review the cost basis or appraisal used to calculate the credit.
- Negotiate indemnities, and consider tax credit insurance against recapture and disallowance.
Frequently asked questions
What is a transferable tax credit?
Under Section 6418, the owner of a qualifying clean energy project can sell its federal tax credit to an unrelated taxpayer for cash. The buyer pays less than face value and uses the full credit to reduce its own federal income tax.
Can individuals buy solar tax credits?
Yes, but with a major limit. Individual buyers are treated as not materially participating, so purchased credits are passive. They can offset only federal income tax on passive income, such as income from rental real estate or passive business interests.
How much do transferable solar tax credits cost?
Prices depend on deal size, credit type, and risk, but solar investment tax credits commonly sell for about 85 to 95 cents per dollar of credit. The discount is the buyer's return and is not taxable income to the buyer.
Can a tax credit be transferred more than once?
No. A credit can be transferred only once. The buyer cannot resell it, and the payment must be made in cash to an unrelated seller.
What are the risks of buying tax credits?
The main risks are that the credit is disallowed or reduced, or recaptured if the project is sold or stops operating within five years. Buyers also face a 20% penalty on excessive credit transfers unless they have reasonable cause. Due diligence, seller indemnities, and tax credit insurance manage these risks.
Sources
Get a solar tax plan before you sign
Our tax attorney and CPA confirm whether the credit and depreciation will actually reduce your tax, and structure the project around the December 31, 2027 deadline.
General information about U.S. federal tax law as of the review date above. It is not legal or tax advice and does not create an attorney-client relationship.