Can an S Corporation or Partnership Buy Transferable Tax Credits?

Published October 29, 2026. Yes. A partnership or an S corporation can be a transferee taxpayer under §6418. The credit does not stay in the entity: it is allocated to the owners, who each apply their own limits. Treas. Reg. §1.6418-3 sets the rules.

What the regulation says

Question	Partnership buyer	S corporation buyer
Can it buy?	Yes, to the extent it is not related to the seller under §267(b) or §707(b)(1) (§1.6418-3(a)(1), (b)(4)(i)).	Yes, to the extent it is not related to the seller under §267(b) or §707(b)(1) (§1.6418-3(c)(2)).
Treatment of the cash price	An expenditure under §705(a)(2)(B), which reduces partners' basis (§1.6418-3(b)(4)).	An expenditure under §1367(a)(2)(D), which reduces shareholders' basis (§1.6418-3(c)(2)).
Who gets the credit	Partners, based on each partner's share of the nondeductible expenses that funded the purchase, under the partnership agreement (§1.6418-3(b)(4)).	Shareholders, pro rata under §1377(a) (§1.6418-3(c)(2)).
Timing	Treated as an extraordinary item allocated as of the transfer date, so changes in partners matter (§1.6418-3(b)(4); §1.706-4).	Pro rata by shareholding, with permitted-year rules where taxable years differ.
Passing it on	An allocation to a partner is not a further transfer. An upper-tier partnership that receives an allocation allocates it to its own partners.	An allocation to a shareholder is not a further transfer.

Points that trip people up

• The owners' limits apply. A partner or shareholder uses the credit subject to the §38(c) limit and, for individuals, the passive activity rules. The transferee takes the credit subject to rules such as §38 and §469 (Treas. Reg. §1.6418-2(f)(3)). Have counsel confirm how the passive rules apply to your structure, especially where owners materially participate in the entity.
• Allocation clauses matter. If the agreement does not allocate nondeductible expenses specifically, the entity's general allocation of nondeductible expenses is used.
• No owner-level resale. Owners cannot sell their share of the credit onward.
• If the entity is the seller. A partnership or S corporation can also sell credits on property it holds directly. The cash is treated as tax-exempt income, allocated by the regulation, and it is not passive income to non-participating owners (§1.6418-3(a)(2), (a)(5)).

When this structure makes sense

Pass-through businesses with high-income owners sometimes use a purchase vehicle so that the credit lands where the tax is. That is a CPA-led decision, because the owners' passive status, basis and §38(c) capacity drive the answer. Start with the client qualification checklist and the qualification guide, and see the agreement checklist.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Figures and rules were checked against the cited sources on October 29, 2026; confirm with your CPA and counsel before acting. See our disclaimer.