Tax990 Knowledge Base

What is the difference between Elective Pay and Transferability?

These provisions aim to provide flexibility for companies and individuals to fully benefit from tax credits, even if they don't have a tax liability to offset directly.

Elective Pay (Direct Pay):

• This allows eligible entities to receive the full value of the tax credit, even if they have little or no tax liability.
• The IRS treats the elective payment as a tax payment and once filed, it is considered an overpayment, which the IRS refunds to the entity.

Note: Elective pay is sometimes referred to as ‘Direct pay’ and is different from the IRS payment method, which is also called ‘Direct pay’.
 
Transferability:

• If an entity cannot use the elective pay option but qualifies for the tax credit, it can transfer the credit to a third party in exchange for cash.
• The terms and pricing of the credit transfer are negotiated between the buyer and seller.