The Inflation Reduction Act of 2022 permits the transfer of renewable energy tax credits to an unrelated party in exchange for cash as part of $369 billion in spending and tax credits for climate and energy programs. This provision could have a significant impact across the energy industry by expanding project financing for renewable energy and providing investment opportunities to new market participants. The transferability of production tax credits (PTCs) and investment tax credits (ITCs) could also make renewable energy projects more attractive to non-traditional project developers.
Rules and Restrictions
Beginning after 2022, an eligible taxpayer can elect to make an irrevocable transfer of an eligible energy tax credit, or any portion of such a credit, to an unrelated party in exchange for cash. The eligible credits are listed below. The compensation for the credit is not taxable to the credit seller and the amount paid is not deductible by the credit buyer. Transfers are also limited to one transfer per credit.
An election to transfer the credit must be made by the due date (including extensions) of the tax return on which the election is made. (An election cannot, however, be made until February 12, 2023, which is 180 days after the enactment of the IRA.) Credits may be claimed in the first tax year of the credit buyer ending with, or after, the tax year of the credit seller. The election is made for each year the credit is available, and credit buyers can carry the credits back for three years.
There is a 20 percent penalty on the buyer, in addition to tax, if the Secretary of the Treasury determines that there was an “excessive credit transfer,” defined as the excess of the credit claimed by the credit buyer over the amount of the credit that would have been allowable to the seller if the credit had not been transferred. The penalty does not apply if the buyer can demonstrate a “reasonable cause” for the excessive credit transfer. How this provision will apply, and what constitutes a “reasonable cause,” will likely be determined through regulation. There is also a basis reduction of 50 percent for properties that are disposed of or no longer qualify as investment credit property before the end of the recapture period.
Increased “Monetization” Opportunities
Transferability provides an additional method for renewable energy developers to “monetize” tax credits and could help increase the amount of funds available for the expansion of renewable energy projects. Traditionally, developers monetize credits through a “tax equity” transaction in which a project developer that is eligible for a tax credit exchanges that credit for project capital. The transaction allows a company with minimal or no tax liability to receive project capital and allows a “tax equity” investor to reduce its tax liability. The exchange is made under a legally binding agreement between the parties, usually a partnership agreement, and could include additional tax incentives or profit interests.
Smaller project developers, however, often have limited access to this market because the transactions are complex and costly to conduct. Tax equity investors are usually large corporations with a large tax “appetite” for the credits, making smaller projects less attractive. The market also depends largely on conditions in the wider economy, and the size of the market can contract during an economic slowdown.
The transferability option may help companies avoid the tax equity market altogether and thereby reduce the cost and complexity of monetizing a tax credit. It could also open the market to new investors by allowing them to purchase a tax credit without acquiring a long-term ownership stake in a project. This could increase the competition for tax credits and increase the price paid to project developers.
Nonetheless, there are limits to the benefit. For example, transferability does not monetize a project’s depreciation benefits. It is also unclear whether the price a buyer will be willing to pay under this structure will result in a better value than a traditional tax equity financing arrangement.
The following tax credits are eligible to be transferred:
Alternative fuel vehicle refueling property credit (IRC Section 30C)
- Renewable energy PTC (IRC Section 45)
- Carbon oxide sequestration credit (IRC Section 45Q)
- Zero-emission nuclear power PTC (IRC Section 45U)
- Clean hydrogen PTC (IRC Section 45V)
- Qualified commercial vehicles (IRC Section 45W)
- Advanced manufacturing PTC (IRC Section 45X)
- Clean electricity PTC (IRC Section 45Y)
- Clean fuel PTC (IRC Section 45Z)
- Energy ITC (IRC Section 48)
- Qualifying advanced energy ITC (IRC Section 48C)
- Clean electricity ITC (IRC Section 48E)
For credits under Section 45, 45Q, 45V, or 45Y, an election must be made separately for each facility for which such credit is determined. Also, the election must be made for each tax year during the 10-year period beginning on the date such facility was originally placed in service. For the Section 45Q credit for carbon oxide sequestration, the election must be made for each tax year during the 12-year period beginning on the date the carbon capture equipment was originally placed in service at such facility.
For more information about the transfer of these tax credits, contact us. We are here to help.
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