Why Buying Energy Tax Credits Could Backfire for Farmers
A concerned farmer reviewing a brochure about energy tax credit purchases.
In an effort to reduce their tax burden, some farmers are considering buying energy tax credits from other businesses. The idea seems simple: purchase a tax credit at a discount and use it to reduce your income taxes. But what appears to be a smart tax strategy could actually lead to disappointment—or worse, wasted money. This blog post will walk you through the pitfalls of buying transferable energy credits, why most farmers can’t use them, and what you must understand before making this financial decision.
Understand the Appeal of Transferable Credits
Thanks to the Inflation Reduction Act, some energy-related tax credits can be transferred or sold between entities. Buyers—often farmers looking to lower their tax bill—can typically purchase these credits for 90 to 95 cents on the dollar, aiming for a significant return on investment.
Sounds great, right? Not so fast.
Why Most Farmers Can’t Use These Credits
The Passive Activity Trap
Here’s the catch: if you didn’t generate the credit yourself, it likely counts as a passive activity. The IRS has strict rules about passive activity credits. You can only use them to offset passive income. Most farmers have active income from operations—not passive.
Important Note: Income from farmland rentals is generally not considered passive income for this purpose.
No Deduction Today—and Maybe Never
If you buy a tax credit but have no passive income, you can't use it immediately. Worse, if you pass away while still holding the credit, it may expire unused. That means you paid real money for a tax benefit you never received.
Would you ever write a check for thousands of dollars and get nothing in return?
That’s exactly what could happen when farmers buy tax credits they can’t legally use.
The Bottom Line
Buying transferable energy tax credits might sound like a smart tax move, but for most farmers, it’s a losing proposition. Without passive income, these credits can’t be used—and there's often no refund or resale value. Understanding the IRS rules around passive activity and material participation is critical before investing in these credits.
