For a number of years, the development of renewable energy and energy transition assets in the US has been incentivized through federal tax credits. The Inflation Reduction Act (“IRA”) which became law in 2022, 1) increased the number of available of credits (herein referred to as “IRA Credits”) and 2) created new channels through which those credits might be monetized. Perhaps the most often discussed monetization channel is the ability to sell federal incentives under Internal Revenue Code (“IRC”) Section 6418. For US federal income tax (“USFIT”) purposes, the sale of a credit under IRC Section 6418 generates income that is federally exempt from taxation. However, this may not be the case at a state and local level. Therefore, a complete understanding of IRC Section 6418 requires consideration of how the transactions are viewed by state and local tax authorities.

State and Local Tax Considerations

The implementation of changes to the IRC naturally raises questions on conformity at the state and local income/franchise tax level. No state or locality has implemented its own credit mechanism equivalent to IRA Credits.[1] As such, to the extent a state does not conform to IRC Section 6418 direct or otherwise conform to the tax-exempt nature of the credit sale proceed, a seller could unknowingly generate taxable income at the state or local level. To determine state conformity to the IRC, we must first consider whether the state conforms to the IRC on a rolling basis, static date, or uses an alternative method. To the extent a state conforms to the IRC on a rolling basis, the state generally needs to decouple from any new IRC sections or amendments if the state does not wish to incorporate the amendment. Administratively, a state’s starting point in determining state income is typically federal taxable income; however, certain states require modifications with respect to certain credits and deductions taken at the federal level. In states that generally adopt rolling conformity to the IRC (e.g., Illinois[2], New York[3], Massachusetts[4], etc.), we would anticipate the sale of the IRA Credits to also be treated as tax-exempt at the state level unless the state passes legislation decoupling from applicable provisions. Given that the federal IRA Credits under IRC Section 6418 are relatively new additions to the IRC, we have not yet seen significant efforts in legislation to decouple from these provisions at the state level. For states with a static conformity date (i.e., they conform to the IRC as of a specific date), additional considerations are required. Certain states with static conformity dates have updated their state statutes to conform to the IRC after the passing of the IRA (e.g., Arizona[5], Florida[6], Kentucky[7], etc.). The state statutes do not appear to require modifications related to the sale of the IRA Credits. As such, we anticipate the sale of the credits to follow USFIT treatment and be exempt for state income tax purposes in these states (unless future legislation requires a modification). To the extent a state has a static conformity date prior to the incorporation of the IRA Credits in the IRC (i.e., August 2022), we’d generally anticipate proceeds from the sale of these credits to be taxable for state purposes. For example, California has a static conformity date as of January 1, 2015.[8] Further, California has not adopted any subsequent amendments to conform to the provisions of the IRA and specifically notes it decouples from IRC Section 6418. Other than California, only a handful of states have a static conformity date prior to August 2022 (e.g., Texas has a static conformity date as of January 1, 2007 and utilizes a gross-margin based calculation[9]; New Hampshire has a static conformity date of December 31, 2018[10]). It is likely that the sale of IRA Credits would be included in taxable income in these states, as the provisions to treat the receipts from the sale of the credits as tax-exempt did not exist at the time of the state’s conformity.

Sourcing of IRA Credits Amongst States

Another question that comes into play when considering state tax treatment of the sale of IRA Credits is how a state will require the receipts from the sale of the credit to be sourced. We anticipate that receipts from the sale of IRA Credits will generally be treated as an intangible for state income/franchise tax sourcing purposes. As such, sourcing of receipts related to those credits will vary from state to state. For example, Texas requires the gross receipts from sales of intangible assets to be sourced to the location of the payor.[11] Arguably, to the degree a sale of IRA Credits is made to a buyer domiciled outside of Texas, the receipts could be sourced to that location and would not be included for Texas purposes. Additionally, some states may consider the sale of IRA Credits to be an isolated or occasional transaction, and would therefore be eliminated from the sales/gross receipts apportionment factor (e.g., California).[12] We note that each situation needs to be factually evaluated to determine the appropriate sourcing. To the extent a company has generated and sold/transferred IRA Credits, we recommend performing additional review to determine how to properly source receipts from the sale of IRA Credits among filing states.

Local Income and Franchise Taxes

Certain localities (e.g., Ohio cities, New York City, etc.) may impose a local income or franchise tax on businesses. In general, most localities conform to the IRC on a rolling basis (e.g., New York City)[13]; however, this is not necessarily true for all local income or franchise taxes. To the extent a taxpayer has material local filings, conformity to the IRC should be further reviewed to determine the tax base utilized as a starting point to determine local income and whether modifications would be required for the sale of IRA Credits.

Gross Receipts Taxes

Certain states and localities may impose a gross receipts tax in lieu of or in addition to a state or local income/franchise tax. No state or locality has specifically addressed the inclusion of proceeds from the sale of IRA Credits for gross receipts tax purposes. To the extent a taxpayer has material gross receipts tax filings, inclusion of proceeds from the sale of IRA Credits should be reviewed.


There are different ways states and localities can address taxability of the sale of IRA Credits. While there has been limited legislation to address the new IRA Credits at the state and local levels, we anticipate taxing jurisdictions will address the sale of such credits through legislation as they are generated and sold/transferred.

How Leo Berwick Can Help

We’re a team of over 55 ex-Big 4 and Big Law tax advisors providing value-added tax due diligence, structuring and modeling services to some of the world’s biggest infrastructure funds, pension funds, sovereign wealth funds, private equity firms, publicly listed companies and private strategic investors. We are a leader in M&A services with respect to renewables and have a dedicated team supporting projects in the renewable energy, energy transition, and federal credit space. At Leo Berwick, we pride ourselves on helping our clients effectively plan, model, and structure their business and operations to get the most out of available credits in this space. Leo Berwick can assist with:

  • Tax structuring to maximize the available energy-related tax credit benefits for state and local income/franchise tax purposes
  • Tax modeling to project the potential cash tax benefits and other impacts of energy-related tax credits for state and local purposes
  • Assisting investors through the process of insuring key state and local income/franchise tax risks associated with energy-related tax credits

If you have further questions about state and local income/franchise tax impacts on IRA provisions, please contact Dorian Hunt, Partner and Head of Renewable Energy (dorian.hunt@leoberwick.com), Toni Lewis, Partner and Head of M&A State and Local Tax (toni.lewis@leoberwick.com), and Kourtney Schott, Vice President, M&A State and Local Tax (kourtney.schott@leoberwick.com).


[1] Note that many states do have credits and incentives available for the renewable energy industry; however, the purpose of this article is to focus on the state conformity with respect to the tax-exempt nature of the sale of IRA Credits.

[2] Illinois Compiled Statutes, 35 ILCS 5/1501(a)(11).

[3] New York Consolidated Laws, N.Y. Tax Law § 208(9).

[4] Mass. Gen. Laws 63 § 30(3).

[5] A.R.S. § 43-105(A).

[6] Fla. Stat. §220.03(1)(n).

[7] KRS 141.010(21).

[8] Cal. Rev. & Tax. Code § 17024.5(1)(P); For additional information of whether California conforms to specific IRC sections and public laws, please visit https://www.ftb.ca.gov/about-ftb/data-reports-plans/Summary-of-Federal-Income-Tax-Changes/index.html.

[9] Tex. Tax Code § 171.0001(9).

[10] New Hampshire Revised Statutes, RSA § 77-A:1(XX)(o).

[11] 34 Tex. Admin. Code § 3.591(e)(21)(b).

[12] Cal. Code Regs. 18 § 25137(c)(1)(A).

[13] Administrative Code of the City of New York § 11-652(8).