Alysse McLoughlin and Katie Quinn of Jones Walker recently discussed the state tax implications of the Inflation Reduction Act’s clean energy credits in a podcast with Tax Notes State Editor in Chief Audrey Pollitt. The Inflation Reduction Act created federal income tax credits to incentivize investment in clean energy projects, with the key feature of transferability allowing for unused credits to be sold to third parties. However, not all states follow the federal relief provision, and some may treat the purchaser’s use of the credit as a gain recognition event when computing state taxable income.
In the interview, Alysse McLoughlin and Katie Quinn highlighted the potential pitfalls for taxpayers purchasing energy credits at a discount in static conformity and decoupled states. They explained that some states may not conform to the Internal Revenue Code from the Inflation Reduction Act year, leading to a tax liability for purchasing a credit at a discount. Two states with outsized energy markets, Texas and California, were specifically mentioned as having this issue, impacting taxpayers across the country purchasing credits in those states.
Katie Quinn outlined factors to consider when determining whether the non-gain recognition provisions of the Inflation Reduction Act apply at the state level, including the conformity date, decoupling from federal tax credit provisions, and state modifications. She emphasized the importance of analyzing state tax laws, looking for addbacks for amounts excluded from federal income, and considering case law interpretations in each state. The unique rules in California, which ignore federal tax credit provisions, were also discussed, adding complexity to the analysis.
Alysse McLoughlin expanded on the arguments against taxing this type of gain, emphasizing the importance of encouraging investments in renewable energy projects to combat global warming and meet the growing demand for cleaner energy sources. She highlighted the need for states to coordinate with the federal government in supporting these initiatives, especially in states like Texas and California with significant renewable energy markets. The discussion concluded with information on where listeners can find updates on future developments, including contacting the speakers directly or visiting the Jones Walker law firm website for blog updates on state tax developments in this area.
