Transferable Tax Credit Glossary

Plain-English definitions of the terms used when buying transferable tax credits and when applying the passive activity rules. Sources are listed at the bottom of the page. Definitions are general information, not tax advice.

Transferable tax credit

A federal tax credit that the owner may sell for cash to an unrelated buyer under IRC §6418. The buyer claims the credit on its own return.

Section 6418

The Internal Revenue Code section that lets an eligible taxpayer transfer all or part of certain clean energy credits for cash. The payment is not income to the seller or deductible by the buyer, and a credit can be transferred only once.

Transfer election statement

The statement the seller attaches to its return, and the buyer reports, to make and document a §6418 transfer, identifying the credit, the amount transferred and the IRS registration number.

Registration number

The number the IRS issues through its energy credit registration process; a seller needs one to transfer most credits under §6418 and the buyer reports it.

Section 48E (clean electricity investment credit)

A credit for investment in qualified zero-emission electricity generation and energy storage facilities placed in service after 2024. The base rate is 6% of eligible basis, or 30% with prevailing wage and apprenticeship compliance or for a facility under 1 MW AC, plus possible bonuses.

Investment tax credit (ITC)

A credit equal to a percentage of the cost of qualifying energy property, claimed for the year the property is placed in service. For new facilities it is the §48E credit; the legacy §48 credit covers earlier projects.

Production tax credit (PTC)

A credit based on electricity produced and sold over a period of years, such as under §45 or §45Y, as opposed to an investment credit based on project cost.

Elective pay

A direct-payment alternative under §6417 for tax-exempt and governmental entities to receive the value of certain credits as a payment. It is different from §6418 transfers, which are sales for cash to a buyer.

Eligible taxpayer

A taxpayer that owns a credit eligible for transfer under §6418 and makes a valid transfer election.

Transferee (credit buyer)

The unrelated taxpayer that pays cash for a transferred credit and may claim it against its own federal income tax.

Passive activity

A trade or business in which the taxpayer does not materially participate, and most rental activities, under §469(c).

Passive income

Income from passive activities, including most rental income, limited partnership business income and gain on disposing of a passive activity. It excludes wages and portfolio income.

Portfolio income

Interest, dividends, royalties and gains on investment property. Under §469(e)(1) it is not passive income, so a purchased credit generally cannot offset tax on it.

Nonpassive (active) income

Wages and income from a business in which the taxpayer materially participates.

Passive activity credit

A credit from a passive activity, which §469 allows only against the tax attributable to passive income. An individual's purchased §6418 credit is generally treated this way under Treas. Reg. §1.6418-2(f)(3).

Tax attributable to net passive income

The portion of regular tax computed by comparing tax with and without net passive income. It is the ceiling for passive credits on Form 8582-CR.

Material participation

Regular, continuous and substantial involvement in an activity, met by any one of seven tests in Treas. Reg. §1.469-5T, such as more than 500 hours in the year.

Real estate professional status (REPS)

A §469(c)(7) status in which rental real estate activities are not automatically passive, requiring more than 750 hours and more than half of personal services in real property trades or businesses in which the taxpayer materially participates.

Closely held C corporation

A C corporation in which more than 50% of the stock value is owned, directly or indirectly, by five or fewer individuals at any time in the last half of the year (§469(j)(1)). It is subject to §469.

Personal service corporation

A C corporation whose principal activity is performing personal services substantially by its owner-employees (§469(j)(2)). It is subject to §469 without the net-active-income rule.

Widely held C corporation

A C corporation that is not closely held. It is generally outside §469 and uses purchased credits against regular tax, subject to §38(c).

Form 8582-CR

The IRS form that individuals, estates and trusts use to figure the passive activity credit allowed for the year.

Form 8810

The IRS form that corporations use for passive activity loss and credit limitations.

Form 3800 (general business credit)

The IRS form that combines business credits, including purchased §6418 credits, and applies the §38(c) limit.

General business credit (§38)

The combination of certain business credits allowed against income tax, limited each year by §38(c). Purchased §6418 credits are treated as general business credits in the buyer's hands.

Section 38(c) limitation

The annual cap on general business credits: net income tax minus the greater of tentative minimum tax or 25% of net regular tax above $25,000. When tentative minimum tax is zero it is roughly 75% of regular tax plus $6,250.

Applicable credit

A credit listed in §6417(b), including §45, §45Q, §45U, §45V, §45X, §45Y, §45Z, §48, §48C, §48E and part of §30C. Applicable credits carry back three years and forward 22 years under §39(a)(4).

Carryback and carryforward

The rules that let an unused credit be applied to earlier or later tax years. General business credits carry back one year and forward 20 years; applicable credits carry back three and forward 22.

Recapture (§50)

The clawback of part of an investment credit if the property is disposed of or stops qualifying within five years of being placed in service. The share recaptured falls 20 points a year from 100%.

Excessive credit transfer

A transferred credit that exceeds the amount the seller was entitled to. Section 6418(g)(2) can impose a 20% addition on the buyer unless it shows reasonable cause.

Prevailing wage and apprenticeship (PWA)

Labor requirements that raise the §48E rate from 6% to 30% for most projects of 1 MW AC or more, and that the project owner must satisfy and document.

Energy community and domestic content bonuses

Adders of up to 10 percentage points each to the §48E credit for projects located in an energy community or meeting domestic content requirements.

Prohibited foreign entity (PFE) and material assistance

Foreign-entity restrictions added in 2025 that can deny certain energy credits for facilities beginning construction after 2025 that rely on too much material assistance from prohibited foreign entities.

Placed in service

The date a facility is ready and available for its specifically assigned function. It fixes the year an investment credit is claimed.

Beginning of construction

The point a project is treated as having started for deadlines such as July 4, 2026 for wind and solar, generally through physical work of a significant nature under IRS guidance (Notice 2025-42 for wind and solar).

At-risk rules (§465 and §49)

Rules that limit losses to the amount at risk (§465) and reduce the credit base for nonqualified nonrecourse financing (§49). For a transferred credit the §49 computation sits with the seller.

Net investment income tax (NIIT)

A 3.8% tax under §1411 on certain investment income above income thresholds ($250,000 joint, $200,000 other, $125,000 married filing separately). Purchased credits generally do not reduce it.

Tax equity

A traditional financing structure in which an investor takes a share of a project's tax benefits in exchange for capital. Credit transfers are an alternative that sells the credit alone.

Tax credit broker

An intermediary that helps a credit owner and a buyer find each other and reach a signed agreement. It does not create the credit or decide the buyer's tax result.

Indemnity and tax credit insurance

Contract protection, and optional insurance, that make a buyer whole if a transferred credit is disallowed, reduced or recaptured.

Credit price (discount to face value)

The cash paid per $1.00 of credit. A price of $0.92 means a buyer pays $0.92 for a credit worth $1.00 of tax reduction.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Rules and figures were checked against the cited sources on November 4, 2026; confirm with your CPA and counsel before acting. See our disclaimer and editorial standards.