By Bryen Alperin, Managing Director
This blog is the second in a series that will explore the opportunities in the transferability of renewable tax credits for investing in renewable energy and reducing tax liability.
The Inflation Reduction Act, signed into law on August 16, 2022, has created new opportunities to invest in a sustainable future. There are many options, but one of the more promising is new transfer provisions which allow for the transfer of renewable energy tax credits between taxpayers. With these new transfer provisions, a taxpayer can purchase a tax credit generated from an eligible project, for example, at $0.90 per $1 of tax credit and then apply the credit to reduce required tax payments to the IRS by the full $1.
We know enough about transferability to be certain that this added feature in the Internal Revenue Code will allow for a meaningful new avenue to access tax credits from renewable energy projects, and we expect these changes to expand the population of taxpayers that participate in the renewable tax credit market. The industry anxiously awaits guidance from the IRS on the intricacies of transferability, and when that guidance will be delivered is still uncertain. However, we do have solid visibility into what participants can expect, including that:
- Taxpayers can elect to transfer all or a portion of their tax credits to a non-related transferee.
- Payment for credits must be in cash.
- The tax credit amount will not be included in taxable income, nor deductible.
- There are no caps or phase outs (unlike direct pay).
- Election must be made no later than the due date (including extensions) for the respective tax return, and is irrevocable.
- Transferees cannot re-transfer the credits.
- If the tax credit is generated by a partnership, the partnership needs to make the election.
- Transferability applies to ITC, PTC, and many other tax credits (CO2 capture, nuclear power production, clean hydrogen, advanced manufacturing production, tech-neutral ITC and PTC, qualifying advanced energy project, and clean fuel production). The only Inflation Reduction Act tax credits not eligible for any kind of third party transfer are 45W tax credits (commercial electric vehicle tax credits).
- For production credits taken over 10 years, the election is made each year.
- You can’t transfer carryforward or carryback credits.
- Transferred tax credits are subject to excessive payment penalties (the fair market value ‘step up’ from the cost basis should be justifiable/defendable).
- Transferability is available for tax years beginning after 2022.
- Transferable tax credits are still subject to recapture if the underlying tax credit was subject to recapture (e.g. for ITCs, there will be a 5-year compliance period during which the solar system is expected to be operational and avoid events that will trigger recapture such as foreclosure of debt or change of ownership).
While we know a great deal, there are some details that we expect the IRS to address with additional guidance in the coming months and some aspects that will come to light as the market matures. For example:
- How adjustments for excessive tax credit will be applied. Pro rata to all types of business credits, or applied first to un-transferred credits.
- Whether transfer credits can be used to offset taxes generated on ordinary (non-passive) income for individuals.
- How the IRS online portal will track the existence and exchange of transfer credits to maintain order in the market.
- How the insurance providers will evolve to assist with mitigating risk specifically associated with transfer credits.
- Which party will bear the risk of recapture subsequent to the sale of the credit (currently expected to be the taxpayer claiming the credits).
- What forms (and documentation/information) will need to be submitted to the IRS to claim the tax credits.
Foss & Company will continue to wield its 40 years of tax credit experience to make it easy for developers and investors to enjoy the benefits of renewable energy tax credits, transferable or traditional in nature. We are staying at the forefront of the renewable energy industry, contributing to working groups and developing a pipeline of opportunities with our developer partners for investors interested in this space. If you are interested in discussing opportunities to reduce your tax payments to the government while furthering the nation’s green energy goals, contact Foss & Company.