What High-Net-Worth Taxpayers Should Understand Before Considering Transferable Credits

The regulatory landscape, the legal debate, and who has a clear path today

The transferable tax credit market created by the Inflation Reduction Act was designed primarily with C-corporations in mind. Widely held corporations are exempt from the passive activity rules under §469, which makes them the most straightforward buyers in the market. But a significant and growing segment of high-net-worth individuals, family offices, and closely held business owners want to know whether these credits can work for them too.

The honest answer is: it depends — and the legal landscape is more nuanced than some in the market will tell you.

This article gives you an accurate picture of where the rules stand today, where the genuine legal debate lives, and which client profiles have a defensible path right now.

The Regulatory Starting Point

When the IRS finalized the §6418 transferability regulations in April 2024, it made one thing explicit: transferred credits are subject to the passive activity rules under §469 for taxpayers who are subject to those rules. That category includes individuals, estates, trusts, closely held C-corporations, and personal service corporations.

Under §469, a passive activity credit can only offset tax liability that is allocable to passive income. Individual and small corporate taxpayers generate passive income in only limited instances, and most do not generate any. The most common sources of passive income are limited partnership interests, rental real estate (for non-real estate professionals), and investments in businesses where the taxpayer does not materially participate.

Treasury and the IRS indicated that not applying the §469 rules could increase the risk of fraud and abuse — which is why, despite significant industry pushback during the comment period, the final regulations declined to relax this standard for individuals.

The practical implication: under final IRS regulations, transferee taxpayers subject to §469 must treat purchased tax credits as passive activity credits, usable only to offset passive income tax liability.

The Legal Counterargument — and Why It Has Serious Practitioners Behind It

The regulatory position above is the conservative, by-the-book reading. There is also a well-reasoned legal counterargument, and it is worth understanding — because some HNW taxpayers are taking this position today, with formal opinion letter support.

The argument goes like this: §469 limits credits that arise in connection with a passive activity of the taxpayer. In a §6418 transfer, the individual buyer acquires only a tax attribute — not equity, not a K-1, not any participation in the underlying project. If the buyer has no activity to which the credit can be attributed, the argument holds that §469 simply has no hook. There is no passive activity of the taxpayer for the limitation to apply to.

This is not a fringe position. It has a statutory basis, and it has been advanced by credentialed tax practitioners with Big 4 backgrounds. The attorney opinion we provide to prospective buyers addresses this question directly and reaches the conclusion that where a transferee has no ownership or participation in the underlying activity, there is a strong basis to conclude that §469 does not apply by reference to that activity.

The IRS, however, has taken the opposite view in its final regulations — specifically addressing transfer-based credits and concluding that the passive rules follow the credit to the buyer regardless of whether the buyer has any direct connection to the underlying project. The final regulations specify that a transferee taxpayer that does not materially participate in the activity that generates a tax credit will have that transferred credit treated as arising in connection with a passive activity.

So the honest framing is this: the legal argument for broader utilization is real and has qualified support. The regulatory position cuts the other way. Any individual buyer taking the non-passive position today is doing so in tension with the final regulations, and should do so only with a formal opinion letter, qualified tax counsel, and a clear-eyed understanding of the audit risk.

Who Has a Clear Path Right Now

Despite the regulatory headwind, there is a category of HNW taxpayer for whom the analysis is considerably cleaner: individuals with meaningful passive income.

If your client holds limited partnership interests, invests in passive real estate, or has other passive activity income, they already have a natural offset bucket. Transferred §45Q credits used to offset tax on that passive income is exactly what the regulations contemplate. The credit is treated as a passive activity credit — and it offsets passive activity tax liability. No tension with the regulations, clean utilization, and the economics of buying a credit at a discount to face value still apply.

A high-income individual taxpayer with a mix of wage income and passive income is the profile most worth evaluating carefully. The question for your client's specific situation is: how much passive income do they generate, and how much of their tax liability is allocable to it? That's the utilization ceiling for the credit purchase — and the right sizing question before any transaction.

For clients in this profile, the utilization path is well-supported under current law. For clients whose income is purely active — W-2, business income from material participation, capital gains from portfolio investments with no passive activity anywhere in their picture — the legal landscape is more complicated, and the risk is higher.

The Guidance That Could Change Everything

There is active legal debate about whether the IRS's application of §469 to §6418 transfers is correct as a statutory matter, and that debate is not resolved. Treasury and the IRS acknowledged during the rulemaking process that comments raised serious questions about §45Q specifically — and indicated this issue would be considered when drafting additional guidance under §45Q and §45Z.

We are tracking the development of a Private Letter Ruling that would directly address this question for §45Q biological DAC credits — specifically whether the unique transfer structure, in which the buyer acquires no activity interest whatsoever, changes the §469 analysis. A favorable PLR would not be binding precedent for the market at large, but it would represent IRS guidance on the specific question and would materially strengthen the legal foundation for individual buyers.

If and when that guidance issues, the calculus for HNW individual buyers changes significantly. Credits that today require a passive income offset — or require the buyer to take a position in tension with the final regulations — could become accessible to a much broader population of high-income taxpayers with ordinary income and capital gains but no passive activity exposure.

For advisors with HNW clients who have expressed interest, it may be worth flagging this as a developing area to revisit when additional guidance emerges.

The Practical Framework for Your Clients

When a HNW individual client asks whether they can use §45Q transferable credits, here is the framework to work through:

Step 1 — Entity type. Is the client investing as an individual, or through a widely held C-corporation? If the latter, §469 does not apply and the analysis is straightforward. Family offices and business owners sometimes have structuring options worth exploring with counsel.

Step 2 — Passive income inventory. Does the client have passive income? Limited partnership distributions, passive rental income, and income from other passive activities create a natural utilization bucket. Quantify it before sizing any transaction.

Step 3 — Risk tolerance and legal support. If the client wants to take the position that §469 does not apply to the transferred credit because they have no underlying activity — the legal argument discussed above — that position requires a formal opinion letter, qualified tax counsel advising on the specific facts, and acceptance of audit risk at the individual level. That is a risk/return decision, not a compliance question with a clean answer.

Step 4 — Timing. Additional IRS guidance on this question is expected. For clients who are interested but want to wait for regulatory clarity, this is a reasonable posture. For clients with passive income who want to act now, the path is cleaner.

A Note on the Market

Some sellers in the transferable credit market market these credits to individuals without adequate disclosure of the §469 issue. That is a problem — not because the credits are illegitimate, but because an individual buyer who doesn't understand the passive activity limitation could end up holding a credit they cannot fully utilize.

The right approach is full disclosure of the regulatory landscape, proper sizing based on the client's actual passive income (if any), and formal legal support for any position that goes beyond that. That is how we approach every transaction, and it is the standard your clients should hold any seller to.

This article is informational and does not constitute tax, legal, or accounting advice. The legal landscape described here reflects current regulations and is subject to change as additional IRS guidance develops. Readers should consult qualified tax counsel regarding their specific circumstances before entering into any credit transfer transaction.