The Inflation Reduction Act (IRA) gave new life to clean energy financing by making two powerful tools widely available for the first time: transferable tax credits and direct pay. Both options are designed to help project sponsors monetize federal tax credits even if they can’t use them directly to offset their own tax liability.

Choosing the right option can unlock meaningful capital, but it depends on your entity type, financing strategy, and long-term project goals.

What’s the Difference?

Transferability allows eligible entities to sell federal tax credits to a third-party buyer, typically a corporation with tax liability. The buyer pays cash to the project sponsor in exchange for the credit and then uses the credit to reduce their own taxes. This is authorized under Section 6418 of the Internal Revenue Code.

Direct pay—also known as elective pay—allows certain types of organizations to receive a cash payment from the IRS equal to the full value of the credit. It is especially relevant for nonprofits, cooperatives, tribal governments, and state or local governments. This is authorized under Section 6417.

Both options serve the same core purpose: turning tax credits into usable cash. But the eligibility rules and mechanics are very different.

Who Qualifies for Direct Pay?

Not all taxpayers can claim direct pay. This option is limited to:

• Tax-exempt organizations
• State and local governments
• Tribal governments
• Rural electric co-ops
• Certain other public entities (like public utilities and school districts)

For a handful of credits—including Section 45Q (carbon capture), Section 45V (clean hydrogen), and Section 45X (advanced manufacturing)—any entity can claim direct pay, even if it’s a for-profit company. But for most energy credits, such as the Investment Tax Credit (ITC) or Production Tax Credit (PTC), direct pay is limited to public or nonprofit entities.

If you’re eligible, direct pay offers a straightforward way to receive the full value of the credit without needing a tax equity partner or credit buyer.

When to Choose Transferability Instead

If your organization is not eligible for direct pay, transferability is the next best path to monetization. It allows you to sell the credit to an outside buyer, usually at a discount to face value, providing liquidity without needing long-term tax equity structuring.

Transferability may be a better option if:

• You’re a for-profit developer or sponsor with limited tax appetite
• You want to avoid traditional tax equity complexity
• You have access to a network of institutional credit buyers
• Your project is eligible for a high-value credit and you want to monetize quickly

The transfer must occur in the year the credit is earned, and both parties must file proper IRS forms to report the transaction.

Considerations for Structuring Your Decision

Here are a few key questions to help guide your decision:

• Are you eligible for direct pay under Section 6417?
• Do you have enough tax liability to use the credits internally?
• Would transferability bring in more capital than a reduced-value direct payment?
• Do you have administrative capacity to manage credit transfers or IRS filings?

The answer may also vary depending on the type of credit you’re claiming. For example, a tribal government developing solar might opt for direct pay, while a private developer with the same project would likely pursue a credit transfer.

How Fallbrook Can Help

At Fallbrook Financial Services, we work with developers, sponsors, and institutional credit buyers to structure and execute transferable tax credit transactions that unlock liquidity and accelerate project timelines. Our team specializes in navigating the complexities of Section 6418, helping clients maximize the value of their credits through strategic placement, pricing, and buyer alignment.

If you’re looking to monetize your federal energy tax credits, Fallbrook is here to help you move from eligibility to execution with confidence.

Have questions about which path is right for you? Contact us at team@fallbrookfinance.com.

Fallbrook Financial Services is a leading advisor in tax credit monetization, specializing in renewable energy, affordable housing, and entertainment finance. We connect developers with institutional capital and offer tailored strategies across more than 40 state and federal incentive programs.