Optimizing Corporate Alternative Minimum Tax (CAMT) through the Use of Transferable Tax Credits
With many companies facing the new corporate alternative minimum tax, clean energy tax credits are available to ease the burden.
The new corporate alternative minimum tax (CAMT) is nothing if not complex. Created by the Inflation Reduction Act (IRA), the CAMT seeks to place a 15% “floor” under corporate taxpayers in order to raise revenues and force certain companies to bring their tax rate up to a uniform level. The number of companies affected is still unknown; the Joint Committee on Taxation estimated 150, but one estimate from KPMG exceeded 300 companies.
Implementation of the CAMT will take some time, as the specifics of the law are developed through IRS guidance and as corporate taxpayers calculate their exposure. In fact, the IRS has already granted penalty relief to companies who have not made estimated tax payments related to the new CAMT. But this relief is, of course, temporary and most companies affected by the CAMT will quickly start to look for viable ways to manage their exposure.
Fortunately, we already know that companies facing the CAMT may still utilize general business tax credits to reduce this tax liability back below the 15% threshold. And while the IRA created this burden, the IRA also created a possible solution in transferable clean energy tax credits that can be obtained with a simple purchase and sale agreement.
As tax teams figure out the CAMT and potential solutions, transferable tax credits are worth some analysis.
CAMT basics
In creating the CAMT, Congress is attempting to do at least two things. First, the CAMT is designed to ensure that profitable corporations pay at least some federal income tax, regardless of the deductions and credits they may claim under the regular tax system. Second, the CAMT is also intended to reduce the gap between the book income and taxable income of corporations, which has been a source of public criticism and scrutiny.
The CAMT applies to large corporations (other than an S-corp, regulated investment company, or real estate investment trust) that report more than $1 billion in profits to shareholders on their financial statements. The CAMT imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of these corporations, which is their income before taxes as reported on their financial statements, with certain adjustments.
KPMG points out that, “Because AFSI diverges in significant ways from taxable income, corporations with a higher than 15 percent effective tax rate cannot assume they have no CAMT liability.” This also means that corporations which are already paying above a 15% effective tax rate may still be subject to CAMT liability.
For example, here is a hypothetical review of what the CAMT’s impact could have been in 2021, from researchers at the University of North Carolina.
Transferable tax credits as a solution
One of the most important adjustments for the CAMT is the allowance of certain tax credits to reduce the CAMT liability–up to 75% of the combined regular and minimum tax. These credits include the same clean energy tax credits–Section 45 production tax credits and Section 48 investment tax credits, among others–that are enhanced by the IRA.
Practically speaking, this means that corporates facing CAMT liabilities can procure renewable energy tax credits via tax equity partnerships or the simpler transferability purchase and sale process to reduce any cash tax burden created or extended by the CAMT.
In addition, once companies are designated as “in-scope” for CAMT–meaning the minimum tax is applicable–that status is “hard to shake, even if income falls below the $1 billion threshold in future years,” per KPMG. So unless future guidance changes this fact, companies facing the CAMT may feel more comfortable structuring multi-year tax credit purchases.
Novogradac suggests that, on balance, this will drive greater appetite for tax credits: “The IRA created a 15% minimum tax on corporate book earnings, which could boost demand for tax credits since some public companies will have larger income tax bills due to the corporate minimum tax and may seek to offset a portion of that tax liability with federal income tax credits.”
In a separate article, however, Novogradac also flags some potential challenges for CAMT-affected companies exploring the tax equity route (as opposed to transferability, for example):
- “...partnerships would be required to report to their partners the allocable share of the partnership’s AFSI. This will likely mean that accountants for those partnerships will need to perform a new analysis that includes certain adjustments, such as for accelerated tax depreciation, to calculate each partner’s share of the partnership’s AFSI as defined by the new law…
- This language also appears to require the corporation to record the flow-through AFSI income and/or losses of the partnership to determine its own AFSI. For tax credit investments that are recorded using the proportional amortization method or other similar methods that account for income or losses “below the line,” this adjustment for investments in partnerships appears to require that income or loss be recorded “above the line” for purposes of determining the corporation’s AFSI.”
Given the preexisting complexities around tax equity investing, transferability appears to be a best-of-both-worlds solution for companies facing CAMT liability. By purchasing renewable energy tax credits, any of the companies in this camp can easily reduce their tax burden without introducing new layers of accounting complexity.
For an overview of transferability, download our transferable tax credit handbook.
Next steps for CAMT and transferability
The Treasury Department released transferability guidance in mid-June, 2023 to clarify the rules behind how these credits are bought, sold, and utilized. There were no major surprises and the guidance was generally friendly to credit buyers. Several key points of clarification include:
- Application to quarterly payments: Treasury formally blessed the application of credits to estimated quarterly payments. While this practice was common for tax equity investors already, receiving formal approval only helps streamline the application of transferable tax credits.
- Credit value is not taxable income: Treasury clarified that the value of the credit to the buyer–that is, the difference between a discounted price paid for the credit and the full dollar of tax savings–is not considered taxable income to the credit buyer.
- Recapture risk to the buyer is partially limited: The risk of credit recapture due to a change in project ownership sits with the developer, not the buyer. The buyer is still responsible for other types of recapture risk, but can secure protection against that with indemnification and insurance.
More clarity around CAMT will undoubtedly develop as companies calculate their exposure and Treasury offers additional guidance. But transferable tax credits will continue to be an attractive solution.
Related Articles
In December 2023, the IRS issued Notice 2024-9, which details how "applicable entities" can satisfy the Inflation Reduction Act's domestic content requirements when using elective pay (which is often called "direct pay"). In particular, projects beginning construction on or after January 1, 2024 may have the value of their tax credit reduced if domestic content requirements are not met.
The IRS refers to the time-based credit reductions as the "statutory elective payment phaseouts."
Applicable credits
The required use of domestic content under elective pay applies to the following credits:
- §45: Electricity produced from certain renewable sources
- §45Y: Clean electricity production credit (technology-neutral PTC)
- §48: Energy credit
- §48E: Clean electricity investment credit (technology-neutral ITC)
Details for each credit can be found in our overview of IRA tax credits.
Applicable entities
Applicable entities subject to the statutory elective payment phaseouts include:
- Organizations exempt from income tax
- Any state or political subdivision thereof
- The Tennessee Valley Authority
- An Indian tribal government
- Rural energy cooperatives
- Alaska Native corporations
Credit reduction
The percentage of credit available to an applicable entity making a direct pay election is determined by multiplying the credit value by an "applicable percentage." Applicable percentages are as follows:
- 100%: Project meets domestic content requirements and/or has a net output of less than one megawatt (alternating current)
- 90%: Project begins construction on or after January 1, 2024 and doesn't meet either of the "100%" requirements
- 85%: Project begins construction on or after January 1, 2025 and doesn't meet either of the "100%" requirements
- 0%: Project begins construction on or after January 1, 2026 and doesn't meet either of the "100%" requirements
Exceptions
The IRS provided two exceptions to the domestic content requirement. If either exception applies, the applicable percentage is 100%.
- Increased cost exception: The inclusion of steel, iron, or manufactured products that are produced in the U.S. increases the project's overall costs of construction by more than 25%
- Non-availability exception: The relevant steel, iron, or manufactured products are not produced in the U.S. in sufficient and reasonably available quantities or of satisfactory quality
Attestation
Applicable entities can claim one of the above exceptions from the phaseout by attaching an attestation to the relevant tax form claiming the credit – form 8835 or form 3468.
The attestation must:
- Be signed by an individual with the power to bind the applicable entity in federal tax matters
- Be made under the penalties of perjury
- State that the entity has reviewed the requirements for each exception and has made a good faith determination that one or both apply
Treasury’s June 2023 guidance made clear that corporate taxpayers can offset their quarterly estimated tax payments using tax credits they “intend to purchase,” opening the door for tax credit buyers to realize most or all of the benefit of a tax credit prior to paying the tax credit seller.
An increasing number of corporate tax directors and treasurers are focused on these types of opportunities, which do not require the buyers to go “out of pocket” to invest in a tax credit. Instead, the buyer pays a clean energy company a discounted amount compared to what they would have paid the IRS; the payment is concurrent with, or in some cases even after their scheduled tax payment date.
In this article, we outline four scenarios where buyers can realize tax benefits prior to cash outlay. We assume the buyer is a corporation that pays $200M each year in federal tax, and is looking to purchase $50 to $100M in tax credits.
Structures that enable buyers to realize full tax benefit prior to cash outlay
Structure 1: §45 PTCs, paid quarterly in arrears
The buyer commits to purchasing $100M in tax credits in Q1, which allows the buyer to offset $25M in tax payments each quarter. Note that if the buyer commits to purchase $100M in Q2 instead of Q1, there is a similarly strong benefit; the buyer can offset $50M in tax payments in Q2, and $25M in both Q3 and Q4.
§45 PTC transactions are typically paid quarterly in arrears. Often, the payment schedule is organized such that the buyer pays concurrently or shortly after each quarterly estimated tax payment date, based on actual tax credits generated during the preceding period. In this example, the buyer pays a clean energy developer $23.75M on each estimated tax payment date, instead of paying the IRS $25M. This results in a $1.25M net benefit each quarter, without any out-of-pocket investment.
Both §45 PTCs, from electricity generated by qualified renewable energy resources such as solar or wind, and §45X AMPCs from advanced manufacturing facilities, can be structured in this way.
Structure 2: §48 ITC portfolio, paid quarterly in arrears
A portfolio of ITCs can be structured similarly to the previous example, where the buyer pays quarterly in arrears (and is therefore able to utilize the full tax benefit prior to cash outlay).
In this example, the seller has a portfolio of rooftop solar projects that will be placed in service throughout the year, generating a total of $100M in tax credits. The seller is offering an 8% discount for the credits. The buyer commits to the tax credit purchase in Q1, and reduces their estimated tax payments by $25M each quarter.
The buyer will pay for the actual credits generated at the end of each preceding quarter. In this example, we assume that $20M in credits are generated in Q1 and Q2, while $30M is generated in Q3 and Q4. As a result, a relatively lower volume of credits need to be paid for in Q1 and Q2 (while the reduction in estimated tax payments remains fixed at $25M each quarter), resulting in a strong net benefit in Q1 and Q2. Overall, the buyer saves $8M in taxes over the course of the year, without any out of pocket investment.
There is a risk that the seller does not generate as many credits as anticipated in a given tax year; if so, a make-whole provision can be negotiated, which obligates the seller to make the buyer whole for any difference between what they agreed to pay for the credits and what they would have to reasonably pay for any replacement credits. In the event of a shortfall of credits, Reunion will also work with the buyer to source replacement credits.
Structure 3: Commit to ITC early in the year, but pay late in the year
In this scenario, a buyer commits to purchasing ITCs that a developer will generate later in the year. While the IRS was clear that buyers can offset quarterly tax payments with tax credits they intend to purchase, it is up to buyers and their legal and tax advisors to decide what documentation is needed to establish intent.
Assume that the buyer and seller execute a tax credit transfer agreement in Q1, and the buyer uses this as a basis to start offsetting quarterly estimated tax payments. If the project is placed in service around or after the Q3 estimated tax payment date, the buyer will be able to offset taxes in Q1, Q2, and Q3 before having to pay the seller for the credits (see example below). This will free up $25M of additional cash each quarter for other corporate purposes, with the understanding that a lump sum will need to be paid to the tax credit seller at a later date.
Sellers typically prefer to receive payment as soon as the credits are generated, but it is possible to negotiate a delayed payment date. For example, if the payment date can be delayed to on or after the Q4 estimated payment date, the buyer will be able to take the full benefit of the tax credit before any cash outlay.
This strategy also applies if the buyer commits to the ITC in Q2 or Q3, and does not have to pay for the credit until later in the year.
Scenario 3 carries the risk that the project is not placed in service in 2024 tax year, which would require the buyer to source replacement credits. It is possible for the buyers to negotiate a make-whole provision, in the event that credits are not delivered as promised.
Structure 4: Buy tax credits to top up at the end of the year, resulting in a lower Q4 or final tax payment
The final scenario is a variation of Scenario 3. A company purchases tax credits at the end of the year, once they have a more concrete understanding of their total annual tax liability, and delays payment until their Q4 or final tax payment date.
Assume the buyer has paid $150M in taxes through the first 3 quarters, and has $50M due in taxes in Q4. The buyer can fully offset their remaining taxes due by committing to purchase $50M in credits in Q4. In this example, the buyer receives an 8% discount, paying $46M for the credits and achieving tax savings of $4M. The buyer can achieve the full benefit of the credit prior to cash outlay by arranging to pay the seller of the tax credit on or after the Q4 estimated tax payment date.
The same logic applies for credits purchased in time for the final tax filing (e.g., on April 15 for the prior tax year, for a calendar year filer). If a buyer has $20M in remaining payments due at final tax filing, they could offset the entire tax payment through purchase of a tax credit. Assuming they could identify and purchase a tax credit with an 8% discount, they would pay $18.4M to a tax credit seller, achieving $1.6M in tax savings. It is worth noting that if the buyer procures more than they end up owing in their final tax payment, the overpayment can be applied to the first estimated tax payment of the following year.
How Reunion works with corporate finance teams to purchase tax credits
Reunion partners with corporate tax and treasury teams to identify and purchase tax credits in a five-step process.
Download an Excel model with the four structures
To download the Excel model featured in this article, please visit our resources page.
Customize these scenarios to your company
Tax credit buyers have a variety of objectives when choosing to purchase a tax credit. Some are focused on maximizing the amount they can save on taxes by looking for the largest discount, while others want to minimize complexity and risk.
We have observed an increasing number of corporate tax and treasury professionals who are focused on transactions that preserve the timing of existing tax-related cashflows, or even improve corporate cash availability relative to the status quo.
Please reach out to the Reunion team if you’d like to examine the cash flow impact of tax credit purchases in further detail, and hear about specific project opportunities that can be structured to maximize economic benefits prior to cash payment.
.png)
