With the Inflation Reduction Act (IRA) introducing a variety of federal tax credits aimed at promoting clean energy, advanced manufacturing and emissions reduction, understanding these tax credits is crucial for maximizing potential savings. This guide explores how companies can leverage these tax credits, including the innovative transferability option that allows businesses to sell their tax credits to offset tax liabilities.
Whether you are a corporation seeking to reduce your tax burden or interested in the emerging marketplace for energy tax credits, Cherry Bekaert's knowledgeable Energy Tax Credits & Incentives team can guide you through the complexities of this tax-saving opportunity.
Transferring Energy Tax Credits: Frequently Asked Questions
What Are Energy Tax Credits?
The IRA included a range of federal tax credits to encourage transitioning to clean energy production, advanced manufacturing, adopting clean vehicles (CVs) and reduced greenhouse gas emissions through alternative fuels and energy-efficient technologies.
The expansion of the production tax credit (PTC) and the energy component of the investment tax credit (ITC) is a significant element of the IRA. This includes extending and modifying the carbon oxide sequestration credit, as well as tax credits for clean hydrogen production and zero-emission nuclear production. Additionally, a new technology-neutral credit will be available for projects starting in 2025. The energy tax credits are able to offset federal taxes owed to the Internal Revenue Services (IRS).
Can I Take Advantage of Energy Tax Credits Without Purchasing Energy Assets?
Yes. One of the most powerful provisions in the IRA is Section 6418, which introduced transferability. This new tax mechanism allows certain eligible credits to be effectively sold from one taxpayer to another.
The seller can monetize their tax credits without tax liability, and the buyer can offset their tax liability for less than its actual amount. Any C-corporation with a significant tax liability should review with a trusted advisor whether this opportunity makes sense.
What Are the Benefits of Transferring Energy Tax Credits?
Organizations that cannot fully take advantage of energy tax credits they have generated or want to help mitigate the cost of an energy tax credit project can sell their credit(s) to another unrelated individual in exchange for cash. An unrelated entity can purchase the energy tax credit at a negotiated discount, effectively lowering their tax liability.
Which Energy Tax Credits Are Eligible for Transfer?
The tax credits eligible for transfer include:
- Section 30C Alternative Fuel Vehicle Refueling Property
- Section 45 Renewable Electricity Production
- Section 45Q Carbon Capture Equipment
- Section 45U Zero-Emission Nuclear Power Production
- Section 45V Production of Clean Hydrogen
- Section 45X Advanced Manufacturing Production
- Section 45Y Clean Electricity Production
- Section 45Z Clean Fuel Production
- Section 48 Clean Energy Property
- Section 48C Qualifying Advanced Energy Project
- Section 48E Clean Electricity Investment
How Are Energy Tax Credits Purchased?
An energy tax credit can only be transferred or purchased in exchange for cash. The transfer must take place before either party has filed their relevant tax return and energy tax credits may only be transferred one time. There are several marketplaces for energy tax credits that have arisen since the passage of the IRA.
Does the Seller Include Proceeds From the Sale of Energy Tax Credits As Income?
The cash proceeds are not included in the seller’s income for federal tax purposes, and the transfer of tax credits has no federal tax consequences.
When Does Cash for the Transaction Typically Change Hands?
During the process, the buyer and seller enter a contract and negotiate a transaction date. Sellers typically look to exchange cash as soon as possible, while buyers want to limit their cash expenditures to as close as possible to their tax deadline. The transaction must occur after the tax credit has been generated (e.g., the asset is placed into service) and before either party files their federal tax return for the relevant tax year.
Who Can Buy Transferable Tax Credits?
Any eligible taxpayer can technically purchase energy tax credits. However, corporations mainly populate the marketplace. This is due to the characterization of the energy tax credits as passive tax credits. High-net-worth individuals and family offices also buy tax credits, but the transferred tax credits can only offset tax liability from passive non-investment income. Because of this, C-corporations dominate the buy-side of the marketplace and are the best situated to take advantage of this opportunity.
What Do Credits Typically Cost?
Tax credits are subject to market supply and demand factors and are typically sold at a cents-on-the-dollar discount. Typical transactions range from a 6% – 15% discount of the total value of the tax credit.
Are There Any Risks in Buying Energy Tax Credits?
Purchase of energy tax credits carries minimal risks. Congress created this transfer mechanism, and the U.S. Department of the Treasury maintains an IRS portal and monitoring system to track the credits and their transfer. Risks that do exist include seller failure in the context of an ITC transfer.
The seller is responsible for maintaining and operating the system and generating the energy credit throughout a five-year recapture period. A seller declaring bankruptcy or abandoning the project can trigger this recapture. Depending on the size of the project, sellers typically offer personal indemnity to buyers and/or insurance on the tax credits.
Additional risks could arise from improper tax credit calculation, which is why proper due diligence is so valuable. Sellers can misattribute certain tax credit magnifiers or incorrectly calculate the cost of the eligible project assets. Working with a trusted advisor can mitigate the chances of purchasing invalid or over-estimated energy tax credits.
Does the Buyer Need To Use the Tax Credit in the Tax Year They Purchased It?
The taxpayer must use the tax credits in the year the project generating the tax credit is considered placed-in-service. However, if they do not use all the tax credits purchased, they can carry the tax credit forward for the next 22 years or take the tax credit to the three previous years, starting with the earliest year first. This carryback provision offers additional arbitrage opportunities in the right situation. Taxpayer purchasers should consult a trusted advisor as to their eligibility.
If My Tax Credit Is Carried Back to Previous Years, How Long Will It Take To Receive a Refund?
There is no set period for receiving a refund. In other contexts, the IRS has issued refunds in the six-to-nine-month range, barring an audit of the return.
Are There Any Other Limitations to Credit Use?
The energy tax credits are general business credits (GBCs) and are subject to the same limitations as other GBCs. This includes the limitation on offset of up to 75% of total tax liability in a tax year.
Is There Any Limitation on the Amount of Credit a Taxpayer Can Purchase or the Total Market Availability of Tax Credits?
No. Congress did not cap the total market or individual transactions. A taxpayer may purchase as much or as little of energy tax credits as they desire.
A purchaser should pay particular attention to how much tax credit they are able to monetize.
Your Guide Forward
Cherry Bekaert has a knowledgeable team with decades of experience working with energy tax credits. We can help determine your eligibility, find you credits to buy, assess and provide due diligence on the tax credits, and ultimately file them on your annual federal tax return. If you have significant federal tax liability, the sooner you reach out to us, the sooner we can help you monetize potentially a significant permanent tax saving.
Related Insights
