Debunking the Myths About Transferable Tax Credits

Repost of the original article in the Novogradac Journal: As the renewable energy market continues to grow, the popularity of transferable tax credits as a way to fund projects and reduce corporate tax liabilities is on the rise. Following the passage of the Inflation Reduction Act, provisions enabling the transfer of tax credits have become hot topics for both developers and investors. In this article, we’ll discuss several common misconceptions regarding transferable tax credit transactions. Transferable Tax Credits Overview Transferable tax credits are a valuable financial instrument that allows businesses to reduce their tax liabilities by investing in projects that generate economic, social or environmental benefits. These tax credits can be sold or transferred between taxpayers, enabling companies with little or no tax liability to monetize the credits and create a new revenue stream. As attractive as this financial tool may seem, it’s essential to understand the associated risks. Myth #1: Transferable Tax Credit Buyers Have No Risk When speaking to project developers or prospective investors, we often hear transferable tax credits compared to state certificated tax credits which have almost no risk associated with them. Unfortunately, there are some risks associated with transferable tax credit transactions and it is important for investors to understand those risks. The risks associated vary across the different types of tax credits eligible for transferability. For example, clean energy investment tax credits (ITCs) are subject to recapture risk for five years following the project being placed in service. Carbon sequestration tax credits are subject to a three-year recapture period and the triggering events for recapture are quite different. Clean energy production tax credits (PTCs) are not subject to recapture, but do face volume risks which could lead to under delivery of tax credits in some years. Myth #2: Recapture Risk is Not a Concern Due…

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