What Is Tax Credit Recapture and How to Avoid It

Tax credits can unlock significant project value, but if compliance slips, that value can disappear. Within the tax credit market, there are three programs that move capital into projects that shape communities and the clean energy transition – the Investment Tax Credit (ITC), Federal Historic Tax Credit (HTC) and the Production Tax Credit (PTC). The ITC and PTC fuel renewable energy generation and storage (including Battery Energy Storage Systems), while the HTC revitalizes historic properties and local economies. While these programs open the door to meaningful investment and impact, they also come with strict compliance obligations. When the IRS reclaims previously earned credits because a project falls out of compliance, this is officially known as recapture.

Understanding recapture risk is essential to protecting returns, maintaining investor confidence and supporting the long-term success of clean energy and historic rehabilitation investments.

 

THE RISE OF RECAPTURE RISK UNDER THE INFLATION REDUCTION ACT

Since the Inflation Reduction Act (IRA) passed in 2022, sponsors and investors have increasingly used tax credits to finance clean energy and historic rehabilitation projects. With that growth comes heightened focus on compliance — and a greater need for disciplined oversight once projects are operational.

If a project falls out of compliance during its applicable compliance period, the IRS may reclaim part, or all, of the tax credits claimed.

 

ITC and HTC Recapture Periods

For the ITC and HTC, the compliance period is five years. Credits “vest” 20% each year over five years:

  • Year 1: Up to 100% recapture
  • Year 2: Up to 80%
  • Year 3: Up to 60%
  • Year 4: Up to 40%
  • Year 5: Up to 20%
  • After Year 5: No recapture risk

 

PTC Recapture Period

For the PTC, compliance runs for ten years and depends on maintaining qualified production. Losing eligibility can disallow current or future credits and, depending on the event, trigger prior-year recapture.

If a facility ceases qualified energy production or otherwise loses eligibility during that window, future credits may be disallowed, and prior-year credits could be subject to recapture depending on the nature of the event.

 

COMMON TRIGGERS FOR RECAPTURE

Recapture can result from various operational or administrative issues, including:

  • Operational failures
  • Sustained downtime, underperformance or changes in qualified use
  • Casualty events
  • Damage from natural disasters without timely remediation or adequate insurance coverage
  • Financial or eligibility adjustments
  • Basis reductions, reclassified expenditures or audit findings affecting qualified costs
  • Ownership or structural changes
  • Transfers or restructurings that occur outside IRS safe harbors
  • Administrative lapses
  • Missed certifications, expired filings or incomplete documentation

Each of these can lead to partial or full recapture depending on timing and severity.

 

FOSS & COMPANY’S APPROACH

At Foss & Company, our focus is on ensuring ongoing compliance once a project is placed in service.

Due Diligence Before Investment

Before bringing an investor on board, our due diligence teams conduct comprehensive underwriting of each project to confirm eligibility, structural integrity and long-term compliance potential. This diligence ensures every project meets the technical, financial and operational standards required for tax credit qualification.  

Asset Management After Placement in Service

Once the project is operational, our asset management team provides active oversight to ensure it remains compliant through the full five- or ten-year period.

We monitor performance, documentation and certifications, identifying and addressing potential compliance risks before they escalate into recapture events. This disciplined approach, combining rigorous due diligence with proactive asset management, has enabled Foss & Company to maintain a zero recapture event record across our investment portfolio.

 

PROTECTING CREDIT VALUE THROUGH OVERSIGHT AND PARTNERSHIP

Recapture is a real risk, but it is manageable with the right partner. By working with a firm that underwrites for compliance durability and actively monitors performance post-placement, investors can safeguard credit value, mitigate risk, and preserve the integrity of their tax equity investments.

 

Contact Foss & Company today to learn more about partnering with a trusted leader in tax equity investment and asset management.