Two Separate Doors, Not One
Direct pay and transferability solve the same underlying problem, monetizing a credit, but they are built for different taxpayers and they don't overlap.
Direct pay is for entities that generally don't pay federal income tax. Tax-exempt organizations, state and local governments, tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric cooperatives, and U.S. territories all qualify. Treasury refers to this group collectively as "applicable entities." Because these organizations have no tax bill to offset, a traditional credit is worthless to them. Direct pay converts the credit into a cash payment from the IRS instead.
Transferability is for everyone else. A taxable corporation, an individual, a fund, any entity with real tax liability, can sell some or all of an eligible credit to an unrelated buyer for cash. The buyer uses the credit to reduce its own tax bill. The seller gets paid up front instead of waiting to use the credit itself.
A taxpayer cannot mix the two for the same credit property. You elect one path or the other, not both.
Who Actually Qualifies for Direct Pay
The list of eligible entities is broader than most people assume at first glance. It's not just charities and nonprofits. State governments, county governments, tribal nations, and their agencies all count. So do instrumentalities of those governments. If your organization doesn't file a normal federal tax return today, that's not a disqualifier, but it does change the mechanics slightly, which I'll get to.
There is also a narrower exception for taxable entities. Corporations and other non-exempt taxpayers can elect direct pay, but only for three specific credits: clean hydrogen production under Section 45V, carbon capture and sequestration under Section 45Q, and advanced manufacturing under Section 45X. Outside those three credits, a taxable entity does not have access to direct pay. It has to rely on transferability instead.
One important carve-out: if a taxpayer elects to treat clean hydrogen property as energy property for purposes of the investment tax credit under Section 48, instead of taking the production credit under 45V, that taxpayer loses the ability to make a direct pay election on that facility. You get one or the other, not both, and the choice has downstream consequences.
Filing Mechanics for Direct Pay
Here's where things get administratively unusual for entities that don't normally deal with the IRS. To receive a direct payment, an applicable entity has to file Form 990-T, the Exempt Organization Business Income Tax Return. That form is familiar territory for a nonprofit. It is completely unfamiliar territory for a city government or a tribal authority that has never filed a federal return in its existence. Treasury's answer was straightforward: file it anyway. There's no alternate form. The 990-T is the vehicle, regardless of whether your organization has ever touched one before.
Alongside the 990-T, the entity also files whatever form corresponds to the specific credit being claimed, plus Form 3800, the General Business Credit form, plus any supporting schedules the instructions call for.
Timing matters here in a way that leaves very little room for error. The election has to be made on an original return, filed on time, with extensions if needed. You cannot fix a missed election by amending a return later. There is no administrative relief for a credit claimed on a late filing. For most tax-exempt and government filers, the deadline sits at four and a half months after the close of the tax year, extendable to ten and a half months. Entities that don't have a standing annual filing obligation get an automatic six-month extension baked in, pushing their effective deadline to ten and a half months as well.
If your organization doesn't already have an established accounting period, the fallback is the calendar year.
The Registration Gate Nobody Can Skip
Before any credit moves, whether through direct pay or transfer, the taxpayer has to complete a pre-filing registration with the IRS. This happens through an online portal, and it applies to every applicable credit property separately. Each project, each facility, needs its own registration number.
That number is tied specifically to the entity that obtained it and to the tax year in which it was issued. If you want to keep claiming the credit in a following year, you renew the registration. It does not carry forward automatically. And if anything about the underlying facts changes before you've actually used a previously issued number, you're required to go back and amend the registration.
Getting a registration number is not the same as getting IRS approval. Treasury has been explicit about this. A number confirms you completed the intake process. It does not mean the agency has reviewed and blessed your eligibility for the credit. That determination happens later, when the return is actually examined. So a registration number is a procedural requirement, not a substantive guarantee, and treating it as the latter is a mistake.
The information required at registration is fairly detailed: the project's physical location down to coordinates, the type of credit involved, beginning of construction and placed in service dates, the entity's tax year and normal filing pattern, and a designated point of contact. Given how much lead time the process can take, and how uncertain the review timeline still is, this is not something to leave until the week before a return is due.
How Transfers Actually Work
Transferability covers a much wider range of credits than direct pay does for taxable entities. Eligible credits include the production tax credit, the investment tax credit, carbon capture, alternative fuel vehicle refueling property, zero-emission nuclear, clean hydrogen, advanced manufacturing, clean fuels, qualifying advanced energy projects, and the newer technology-neutral production and investment credits. It's a long list, and it covers most of what a developer working across generation, storage, and manufacturing would encounter.
A few structural rules govern every transfer, regardless of which credit is involved.
Bonus credit amounts, the additions for domestic content, energy community location, or low-income community benefit, can only be transferred attached to the base credit they belong to. You can't strip the bonus off and sell it separately.
A credit can only change hands once. If a broker facilitates the sale, that's not treated as a transfer in itself. But if a dealer buys the credit intending to resell it to someone else, that second sale runs straight into the one-transfer rule and isn't permitted.
Payment has to be cash, or a cash equivalent, a wire, an ACH transfer, a cashier's check. Nothing else counts as valid consideration. And there's a window for when that payment can happen: no earlier than the first day of the seller's tax year in which the credit was generated, no later than the date the return claiming the transfer is filed. Developers who need financing before that window opens sometimes look to bridge loans from a prospective buyer, but that has to be structured carefully so the loan itself doesn't get treated as improper early consideration for the credit.
Every transfer requires a signed transfer statement, executed by both parties under penalty of perjury, describing the credit type, the amount, the payment timing, and the registration number. Multi-year transfers need a fresh statement for every year involved.
On the tax side, the cash that changes hands in a transfer sits outside normal income and deduction rules. The seller doesn't include the payment in income. The buyer doesn't get to deduct what it paid. The IRS has flagged, though, that it will look closely at deals where the "credit purchase" appears to actually be compensation for something else entirely, so the paperwork needs to reflect economic reality, not just label everything correctly.
Depreciation Doesn't Travel With the Credit
This is one of the most consistently misunderstood parts of a transfer transaction. Whoever sells the credit keeps the depreciation. There is no way to sell both together through a straight transfer. Only the actual owner of the underlying property can claim depreciation deductions.
If depreciation value is significant enough that a developer wants to move it along with the credit, the answer isn't a bigger transfer; it's a different structure entirely, something like a partnership flip or a sale-leaseback, where an investor becomes a genuine owner of the asset and picks up depreciation as part of that ownership stake.
One more mechanical point worth knowing: whoever holds the ITC has to reduce their tax basis in the property by half of the credit amount claimed. That basis reduction happens regardless of whether the credit itself gets transferred.
Who Actually Carries the Risk
This is the part that changes how these deals get negotiated, and it surprises people who assume risk naturally sits with whoever generated the credit.
If a credit transfer turns out to be excessive, meaning more credit was transferred than the property actually supported, or if the credit gets recaptured later, the liability sits with the buyer. Not the seller. The buyer is the one who has to repay the disallowed amount to the government.
Because of that, buyers negotiate hard for indemnification from sellers, and increasingly for tax credit insurance as a backstop. If a credit was sold to more than one buyer and it turns out some portion was excessive, the shortfall gets prorated across all the buyers based on how much each one purchased.
There's also a 20 percent penalty that applies to buyers on excessive credit transfers, though there's a reasonable cause exception. The single biggest factor in establishing reasonable cause is how much diligence the buyer actually did before closing, whether they verified the credit amount independently, relied on credible third-party experts, and generally acted like someone protecting real money rather than taking a seller's numbers at face value. Recapture works a little differently. Since it's a later event rather than something wrong at the point of sale, it doesn't carry that same 20 percent penalty, but the repayment obligation still lands on the buyer.
Sellers aren't directly liable to the government if a transfer turns out to be excessive. But in practice, that just pushes the liability into the contract. Buyers demand indemnification, so the seller ends up carrying the exposure anyway, just through a private agreement instead of a government enforcement action. This is exactly why these transactions now involve heavier due diligence and more heavily negotiated purchase agreements than a simple cash sale would suggest.
Partnerships Add Another Layer
Partnerships and S corporations can elect direct pay, but only for the same three credits available to other taxable entities: clean hydrogen, carbon capture, and advanced manufacturing. A partnership with tax-exempt partners doesn't get to piggyback on those partners' applicable entity status. The election happens at the entity level, and a partnership itself isn't an applicable entity just because some of its partners are.
When a direct payment is made to a partnership or an S corporation, the credit gets reduced to zero before anyone's individual share is calculated. The cash payment itself is treated as tax-exempt income, allocated to each partner in the same proportion their credit would have been allocated if it hadn't gone through the direct pay election at all.
A partnership can't split its approach either, electing direct pay for the portion attributable to tax-exempt partners while transferring the rest for taxable partners. It's one election, for the whole applicable credit property.
For a straightforward transfer, partnerships have more flexibility. Each partner can independently decide how much of their allocable share to sell and how much to keep. The tax-exempt income generated by that sale gets allocated specifically to the partners who chose to sell, not spread evenly across everyone regardless of participation.
There's also an interaction with the at-risk rules under Section 49, which limit credit amounts tied to nonqualified nonrecourse financing. For a partnership transferring credits, this limitation gets applied at the individual partner level, measured as of the date the property is placed in service. A partnership has to actually go out and collect this financing information from each partner before it can determine how much credit is really available to transfer.
The Bigger Picture
What all of this adds up to is a monetization market that finally has enough procedural clarity to function at scale. Before this guidance, a lot of eligible taxpayers sat on the sidelines simply because too many basic questions were unanswered: what form do we file, how does registration actually work, who's on the hook if something goes wrong later. Those questions now have answers, even if some of the finer details are still being worked out.
For municipalities, cooperatives, and tribal governments sitting on direct pay eligibility, the opportunity is real, but the filing obligations are unfamiliar territory that requires planning well ahead of a return deadline. For taxable entities looking at transfers, the economics are attractive, but the risk allocation means real diligence has to happen before money changes hands, not after.
Neither path is complicated once you understand the mechanics. But both punish anyone who treats the process as a formality rather than a set of deadlines and documentation requirements that have to be hit correctly, the first time, with no do-over available.