The clean energy tax credit market has grown rapidly since transferability was introduced by the Inflation Reduction Act. For buyers these credits represent a real opportunity: pay cash to acquire a credit at a discount, then apply it to reduce your federal income tax liability.

But there’s a catch - buying a credit doesn’t always mean you can use it. The rules for applying purchased credits depend on how your income is categorized under the tax code, not just on the size of your tax bill. That’s where much of the confusion lies.

This guide is written for individuals and their advisors - CPAs, RIAs, family offices, and attorneys - as well as owners of pass-through entities (partnerships, LLCs, S corporations, trusts, and estates) where tax ultimately flows through to the individual return. Corporations are also eligible buyers, but for them the rules are generally straightforward as credits can usually be applied directly against federal income tax. For individuals and pass-through owners it’s more complicated because credits interact with the passive activity rules and the general business credit framework, which limit the types of income they can offset.

This guide is designed to cut through that complexity. Its focus is to explain how a purchase works, to show which types of income credits can actually offset, and to highlight the important edge cases and nuances that often make the difference in whether a credit is truly usable. Together, these form the practical foundation for any individual buyer considering this market.

Part I — Transferability & How a Purchase Works

Transferability, created under Internal Revenue Code (IRC) §6418, is what makes this entire market possible. It allows a credit earned by one taxpayer to be sold for cash to an unrelated buyer, who then claims it directly on their return.

From start to finish, a credit purchase will typically take 3–7 weeks, though the timeline depends on the readiness of both the buyer and seller. The process follows a clear sequence, but each step requires substantial documentation, diligence, and coordination.

1. Confirmation of interest. The buyer indicates interest in a portfolio at certain terms. This is where the conversation begins but no commitments are made.

2. Confirmation from seller(s). Seller(s) confirm they are willing to sell credits under those conditions. At this point, parties may also sign an NDA to allow information sharing.

3. Term sheet signed. A term sheet is executed setting out the key economic terms. While this is negotiated, the full Tax Credit Transfer Agreement (TCTA) begins to take shape.

4. TCTA signed. The TCTA formalizes the deal, including all transaction terms, indemnities to protect the buyer, and obligations of both parties. This is the central, legally binding document for the transfer.

5. Diligence & insurance. In parallel with the contracting process, the underlying projects ideally should undergo diligence to confirm eligibility and ensure they can stand up under IRS scrutiny. At Concentro, we help manage this process end-to-end including validating eligibility, structure, project costs, financing, bonus adders, and compliance with prevailing wage & apprenticeship. We’re also able to arrange tax credit insurance to further protect buyers, if requested. Importantly, for transactions under $5M, it is often difficult for buyers to secure coverage due to large minimum insurance premiums which is where our scale enables us to extend coverage even on smaller deals. Below is a snapshot of Concentro’s process:

Concentro's diligence process for clean energy tax credits

6. Closing & payment. Funds are wired according to the terms negotiated - often the later of the IRS pre-filing registration IDs being issued or the TCTA being signed. When filing taxes, the buyer attaches the Transfer Election Statement with the registration number and claims the credit on Form 3800. Credits are recognized in the buyer’s tax year that includes the last day of the seller’s tax year in which the credit was generated.

Part II — What Taxes Can Purchased Credits Offset?

When it comes to purchasing clean energy tax credits, one of the most important questions for an individual buyer is whether they are eligible to actually use a credit to offset their tax liability.

Under the tax code, purchased credits are generally treated as passive activity credits. That means they can reduce the tax generated by your net passive income, but not the tax that comes from active earnings (such as wages or business income where you materially participate) or portfolio income (such as dividends, interest, or capital gains from securities).

This structure was intentional. In the 1980s, Congress curtailed tax shelters that allowed investors to offset salary and portfolio income with paper losses. When credits became transferable under the Inflation Reduction Act, the same framework was applied - ensuring they could be used, but only within the passive income category.

Because the rules are nuanced, it helps to look at the major categories of income side by side. The table below summarizes the most common income types and liquidity events, showing whether purchased credits can be used against them, and why.

Tax Credit Usability by Income Type

Clean Energy Credit Offset – Income Types Table
Income / Event Description Eligible for Credit Offset? Example
Active Earnings
W-2 wages, self-employment, guaranteed paymentsCompensation and earned income from servicesNo – NonpassiveEmployee earning a wage/salary from an employer
Active business (partnership/S corp with material participation)Business income where owner materially participates in the businessNo – NonpassivePhysician actively working in a medical practice partnership
Trader income with §475(f) electionIncome from a securities trading businessNo – NonpassiveDay trader elects §475(f) mark-to-market for trading business
Portfolio Income
Interest, dividends, annuitiesPassive investments not tied to a businessNo – PortfolioInvestor earns $400k in dividends and bond interest
Capital gains from securitiesGains from selling stocks, ETFs, mutual funds, options, etc.No – PortfolioInvestor sells $2M of appreciated stock holdings
REIT dividendsDistributions from real estate investment trustsNo – PortfolioRetiree receives $150k in REIT dividends
Royalties not from a trade/businessRoyalties received personally outside a businessNo – PortfolioAuthor earns $75k in royalties from a published book
Passive Business Income (Non-PTP)
K-1 income (no material participation)Partnership/LLC business income without participationYes – PassiveLimited partner allocated $120k of passive income on K-1 from a business they don’t materially participate
Rental real estate (typical landlord)Long-term residential or commercial rentalsYes – PassiveLandlord reports $90k net income from three rental houses
Rental real estate (Real Estate Professional + participation)Rentals managed actively by Real Estate Professional (REP)No – NonpassiveREP with 10 rental properties, all materially managed
Short-term rentals – active hostRentals ≤7 days or with substantial services; owner materially participatesNo – NonpassiveOwner personally manages bookings, cleaning, and guest services for multiple STRs
Short-term rentals – passive ownerRentals ≤7 days on average; owner does not materially participateYes – PassiveInvestor owns an Airbnb with 5-night average stays and hires a manager
Self-rental to your own businessProperty rented to your nonpassive activityNo – NonpassiveLawyer rents an office building he owns to his active law practice
Royalties from trade/business (no participation)Royalties earned through a passive business interestYes – PassiveInvestor owns a share of a mineral rights partnership but does not take part in operations
Publicly Traded Partnerships / Master Limited Partnerships (PTPs/MLPs)
PTP/MLP incomePassive income from a publicly traded partnership (e.g., energy MLP)No – Passive but siloed; purchased credits cannot offset PTP income, since each PTP is treated as its own silo under §469(k)Investor has $80k of passive income from a pipeline MLP; purchased clean energy credits cannot offset this tax
Sales & Liquidity Events
§1231 gain from sale of passive propertySale of rental or business property from a passive activityYes – PassiveFormer landlord sells apartment building for $400k gain
§1231 gain from sale of active propertySale of property tied to an active businessNo – NonpassiveBusiness owner sells equipment from their active factory
Sale of partnership/LLC interest – typical structureSale of partnership interest; treated as capital gainNo – PortfolioLP investor sells 10% interest in private equity fund for capital gain
Sale of partnership/LLC interest – asset-sale alternativePartnership sells underlying assets and passes through gainYes – Passive (if activity passive)LP sells rental properties and allocates §1231 gain on K-1 to a passive investor
Installment sale of passive propertySale with payments recognized over timeYes – PassiveLandlord sells rental building and reports $100k gain annually under installment method
LP/LLC cash distribution – no K-1 incomeCash out that is a return of capital or basis reductionNo – No passive income createdInvestor receives $500k distribution but K-1 shows $0 income
LP/LLC cash distribution – with K-1 passive incomeCash distribution alongside reported passive incomeYes – PassiveInvestor receives $300k cash and K-1 showing $120k passive income
Brokerage/RIA portfolio liquidationSelling securities to raise cashNo – PortfolioInvestor liquidates $2M brokerage account to fund a purchase
Earn-outs after active business saleDeferred payments from sale of active businessNo – NonpassiveBusiness founder receives contingent payments after selling company
Retirement & Other
IRA/401(k) distributions, Roth conversionsWithdrawals from retirement accountsNo – NonpassiveTaxpayer converts $1M from a traditional IRA into a Roth IRA, triggering ordinary income
Additional taxes (NIIT, SE tax, Medicare, 10% penalty)Surtaxes and payroll taxesNo – Credits reduce income tax onlyInvestor subject to 3.8% NIIT on $500k of investment income
Trusts & Estates
Trust/estate allocations – portfolio or active underlyingBeneficiary receives portfolio or active business incomeNo – Portfolio/NonpassiveTrust allocates $150k dividends and $50k active K-1 income
Trust/estate allocations – passive underlying activityBeneficiary receives income from a passive activityYes – PassiveTrust allocates passive rental income to a beneficiary
Closely Held Corporations & LLCs filing as C-Corps
Closely held C-corp (not a PSC)A corporation where >50% of value is owned by 5 or fewer individualsYes – Passive and limited Active; credits offset passive income and, up to the tax on net active income, also active business income (not portfolio)Family-owned C-corp reports $200k passive rental income and $500k active business income; credits offset passive tax and, to the extent allowed, active tax
Closely held C-corp that is a PSCC-corp primarily performing personal services (health, law, engineering, etc.) and owned by employeesYes – Passive only; PSCs follow individual rules—credits cannot offset active or portfolio incomePhysician group organized as a PSC earns $1M in service income and $150k passive rental income; credits apply only to the rental income tax
LLC electing C-corp statusLLC taxed as a C-corporation (files as a C-corp for federal purposes)Yes – Treated the same as a C-corp; credits offset federal income tax liability directlyAn LLC with multiple owners elects C-corp taxation and applies purchased credits against its corporate federal tax liability

As you can see, there are exceptions and edge cases that depend on the facts of each situation. For that reason, we recommend individuals consult with their CPA before buying credits. Concentro also has the expertise to help guide buyers through these nuances and ensure credits are matched to the right tax profile.

Part III — Nuances and Overlays

The table in the previous section shows the broad rules, but the reality is that clean energy credits sit on top of other parts of the tax code. These overlays can affect whether a credit is usable in a given year and, if so, how much of it can be applied.

Alternative Minimum Tax (AMT)

Not all credits work the same way against the AMT. The IRC §48 Investment Tax Credit (and the technology-neutral §48E) are treated as specified credits so they can generally offset both regular tax and AMT. By contrast, the IRC §45 Production Tax Credit has limited AMT relief tied to placed-in-service timing, so it may not offset AMT in all cases. Some other credits, such as IRC §45X advanced manufacturing or IRC §45V clean hydrogen, AMT treatment can vary by year so check the current Form 3800 instructions. For buyers, the practical takeaway is to focus on credits that are clearly usable against AMT if there’s a chance your income profile will trigger it.

Grouping and self-rental rules

The passive activity rules allow related activities to be grouped together. In some cases, grouping can make the difference between income being treated as passive or nonpassive. For example, if you own both a passive interest in a storage business and an active role in a related logistics company, grouping could shift the storage income to nonpassive. Similarly, the self-rental rules recharacterize rental income as nonpassive when you rent property to your own active business - for instance, owning the building your law practice operates from (as per the example in the table in Part II). These rules don’t eliminate the credit, but they may reduce your ability to apply it in the current year.

Carrybacks/carryforwards and ordering

Clean energy credits are part of the general business credit under IRC §38. For transferable IRA credits (ITC, PTC, §45X, §45V, and others), the window is three years back and twenty-two years forward. Ordering matters: credits are applied first to the current year, then - if you elect a carryback - to the earliest prior year in the window, and finally forward. Carrybacks are optional, so if you prefer not to amend prior returns you can simply carry any unused balance forward.

Example: You purchase a $1 million ITC in 2025. You use $300,000 that year, leaving $700,000. If carried back, you might apply $200,000 to 2022, $150,000 to 2023, and $250,000 to 2024, with the final $100,000 carried forward for up to 22 years. If you choose not to carry back, the full $700,000 carries forward beginning in 2026.

In practice, we see most buyers purchase to match current-year liabilities. Carrybacks are less common but can be valuable for those with unusually high income in prior years who want to trigger refunds.

Conclusion

Purchased clean energy credits can be a valuable tool for reducing federal income tax, but their usability depends on how your income is classified under the passive activity rules and the general business credit limits. For most individual buyers, credits work best when there is steady net passive income - from rentals, limited partnership interests, or other passive activities. They do not offset wages, portfolio gains, or retirement withdrawals, and special rules apply for PTPs, closely held C-corps, and other edge cases.

The takeaway is straightforward: before buying, confirm with your CPA whether you have enough passive income capacity this year - or in future years - to use the credits. Concentro’s role is to make the rest seamless: sourcing high-quality credits, conducting thorough vetting and diligence, arranging insurance where needed, and managing the end-to-end process so buyers capture the full benefit of their purchase.

This market is continuing to mature and expand as more projects generate credits each year. For buyers who understand the rules, there is significant opportunity. We hope this guide provides clarity and a practical starting point for individuals and advisors considering how clean energy credits can fit into a broader tax strategy.

References

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