Tax credit transferability under the Inflation Reduction Act(IRA) has changed the landscape for monetizing federal clean energy tax credits. Historically, extracting credits from a renewable energy developer required a long-term investment through nuanced ownership structures. However, the IRA has created an attractive alternative to these investments by allowing credits to be directly transferred, creating a burgeoning credit marketplace for companies hungry for tax savings.
Transferability under the IRA
The IRA permits tax credit transfers of several types of green energy tax credits. Any “eligible taxpayer” may transact, but the opportunity is generally most beneficial to for-profit corporations. While the landscape is still evolving, the marketplace facilitates purchasing discounted credits with a shortened investment period and streamlined process as compared to traditional “tax equity” investments.
The tax credit purchase price can vary based on the seller’s creditworthiness, project size, credit type and amount, and existence of tax insurance. Credit purchases must be made in cash by an unrelated party and can only be sold once. The credit is transferred via a tax credit transfer agreement and a transfer election statement is attached to the seller’s and purchaser’s tax return for the applicable tax year.
Which strategy to pursue
There should continue to be a robust market for both traditional tax equity and tax credit transferability transactions. Developers remain incentivized to pursue tax equity investments to monetize tax depreciation benefits that are not included in transferability transactions.
In either scenario, the investor should perform due diligence and consider tax insurance to limit risk. Ultimately, each developer and investor must make an independent determination which strategy makes sense for their specific situation.
How we can help
CLA’s energy services team can help you evaluate strategies to meet your clean energy and tax-saving objectives. From cash flow modeling to tax credit monetization, our team advises on end-to-end planning for renewable energy project developers and investors.
For more information on IRA Energy Credits, contact Brandon Hill at brandon.hill@CLAconnect.com or 816-671-8914 or Michael DePrima at michael.deprima@claconnect.com.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Insight Publications, LLC.
