In-Depth Look: Transferable Tax Credits Under the Inflation Reduction Act
The Inflation Reduction Act (IRA) created 11 transferable tax credits.
Key features of the IRA's 11 transferable tax credits
The Inflation Reduction Act (IRA) created 11 transferable tax credits to promote investment into clean energy. This article summarizes key features of each transferable credit including technology, duration, period of availability, and rates. Depending on the credit, we included three rates:
- Base: Rate assuming prevailing wage and apprenticeship requirements are not met.
- Full: Rate assuming prevailing wage and apprenticeship requirements are met. The full rate is five times higher than the base rate.
- Bonus: Additional rates assuming bonus credits – energy community, domestic content, low-income community – are met.
Jump to a credit
To jump directly to a credit, click a link below:
- §45 PTC – Electricity produced from certain renewable sources
- §45Y PTC – Clean electricity production credit (technology-neutral PTC)
- §48 ITC – Energy credit
- §48E ITC – Clean electricity investment credit (technology-neutral ITC)
- §30C ITC – Alternative fuel vehicle refueling property credit
- §45U PTC – Zero-emission nuclear power production credit
- §45Q PTC – Credit for carbon oxide sequestration
- §45Z PTC – Clean fuel production tax credit
- §45V PTC – Clean hydrogen production tax credit
- §48C ITC – Advanced energy project credit
- §45X PTC – Advanced manufacturing production credit
§45 PTC - Electricity produced from certain renewable sources
Funding mechanism: Production tax credit
Technology grouping: Electricity
IRA Section: 13101
New or existing: Existing - modified and extended
Eligibility: Facilities generating electricity from wind, biomass, geothermal, solar, small irrigation, landfill and trash, hydropower, and marine and hydrokinetic renewable energy
U.S. Code: 26 U.S. Code §45
Duration: 10 years from the date the project is placed in service
Period of availability: Projects must begin construction prior to 1/1/2025. For projects placed in service in 2025 or later, the §45Y PTC will replace the §45 PTC
Stackability and limitations: Cannot be stacked with §48
Inflation adjustment: Subject to an annual inflation adjustment
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Not applicable
Rates
The §45 PTC has two different rate regimes depending on when a project was placed in service. If a project was placed in service before 1/1/2022, the full PTC calculation is [1.5 cents] x [inflation adjustment factor] rounded to the nearest 0.1 cents. Importantly, projects placed in service before 2022 are not subject to prevailing wage and apprenticeship requirements. If a project was placed in service after 12/31/2021, the full PTC rate calculation is [0.3 cents] x [inflation adjustment factor] rounded to the nearest 0.05 cents. For projects meeting PWA requirements, this product is multiplied by five.
- Base rate (placed in service before 1/1/22): Not applicable. Projects placed in service before 1/1/22 are not subject to prevailing wage and apprenticeship requirements. They receive the full rate
- Base Rate (placed in service after 12/31/21): $5.50 per MWh for wind, closed-loop biomass, geothermal, and solar. $3.00 per MWh for open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy
- Full rate: (placed in service before 1/1/22): $28.00 per MWh for wind, closed-loop biomass, and geothermal. $14.00 per MWh for open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy
- Full Rate (placed in service after 12/31/21): $27.50 per MWh for wind, closed-loop biomass, geothermal, and solar. $15.00 per MWh for open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy
- Energy Community: 10%
- Domestic Content: 10%
§45Y PTC - Clean electricity production credit
Funding mechanism: Production tax credit
Technology grouping: Electricity
IRA Section: 13701
New or existing: New
Eligibility: Technology-neutral tax credit for production of clean electricity. The §45Y PTC is for facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero
U.S. Code: 26 U.S. Code §45Y
Duration: 10 years from the date the project is placed in service
Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.
The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.
Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2035 and meets PWA requirements will generate §45Y PTCs worth $13.75 per MWh when it is placed in service.
Stackability and limitations: Cannot be stacked with §48E or §45Q
Inflation adjustment: Subject to an annual inflation adjustment
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Not applicable
Rates
- Base rate: $5.50 per MWh (as increased by annual inflation adjustment factor from 2023)
- Full rate: $27.50 per MWh (as increased by annual inflation adjustment factor from 2023)
- Energy Community: 10%
- Domestic Content: 10%
Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§48 ITC - Energy credit
Funding mechanism: Investment tax credit
Technology grouping: Electricity
IRA Section: 13102
New or existing: Existing - modified and extended
Eligibility: Fuel cell, solar, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties
U.S. Code: 26 U.S. Code §48
Period of availability: Projects must begin construction prior to 1/1/2025. For projects placed in service in 2025 or later, the §48E ITC will replace the §48 ITC
Stackability and limitations:
- Cannot be stacked with §48E, §45, §45Y, §48C, §45Q
- Subject to recapture per §50
Inflation adjustment: None
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Subject to five-year recapture period beginning on placed-in-service date. Recapture amount decreases by 20% per year
Rates
- Base rate: 6%
- Full rate: 30%
- Energy Community: 10%
- Domestic Content: 10%
- Low-Income: 10% if located in low-income community or on Indian land. 20% if part of qualified low-income residential building project or qualified low-income economic benefit project. Limited to projects less than 5 MW
Guidance (since passage of the IRA):
- Notice of proposed rulemaking: Definition of Energy Property and Rules Applicable to the Energy Credit (11/22/2023)
- Final rule pending
§48E ITC - Clean electricity investment credit (technology-neutral ITC)
Funding mechanism: Investment tax credit
Technology grouping: Electricity
IRA Section: 13702
New or existing: New
Eligibility: Technology-neutral tax credit for investment in facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero
U.S. Code: 26 U.S. Code §48E
Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.
The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.
Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2034 and meets PWA requirements will generate a §48E ITC worth 22.5% of the project’s qualified investment when it is placed in service
Stackability and limitations:
- Cannot be stacked with §48, §45, §45Y, §48C, §45Q
- Subject to recapture per §50
Inflation adjustment: None
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Subject to five-year recapture period beginning on placed-in-service date. Recapture amount decreases by 20% per year
Rates
- Base rate: 6%
- Full rate: 30%
- Energy Community: 10%
- Domestic Content: 10%
- Low-Income: 10% if located in low-income community or on Indian land. 20% if part of qualified low-income residential building project or qualified low-income economic benefit project. Limited to projects less than 5 MW
Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§30C ITC – Alternative fuel vehicle refueling property credit
Funding mechanism: Investment tax credit
Technology grouping: Vehicles
IRA Section: 13404
New or existing: Existing - modified and extended
Eligibility: For clean-burning fuels, as defined in the statute. Alternative fuels include electricity (charging property), ethanol, natural gas, liquified petroleum gas, hydrogen, and biodiesel
U.S. Code: 26 U.S. Code §30C
Period of availability: Project must be placed in service between 1/1/2023 and 12/31/2032
Stackability and limitations:
- The project must be in the U.S. in a low-income or rural area
- The credit is capped at $100,000 per property
Inflation adjustment: None
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Recapture provision is anticipated in Treasury proposed regulations
Rates
- Base rate: 6%
- Full rate: 30%
Guidance (since passage of the IRA):
- Notice 2022-56: Request for comments on Section 45W and Section 30C (12/3/2022)
- Notice 2024-20 Guidance on Satisfying the Geographical Requirements of the Section 30C Alternative Fuel Vehicle Refueling Property Credit (1/19/2024)
- Notice 2024-20 - Appendix A List of 11-digit census tract GEOIDs that are eligible for § 30C using 2015 delineations of census tract boundaries (1/19/2024)
- Notice 2024-20 - Appendix B List of 11-digit census tract GEOIDs that are eligible for § 30C using 2020 delineations of census tract boundaries, including non-urban census tracts (1/19/2024)
- Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan. §30C was previously authorized under law, so existing guidance may still apply
§45U PTC – Zero-emission nuclear power production credit
Funding mechanism: Production tax credit
Technology grouping: Electricity
IRA Section: 13105
New or existing: New
Eligibility: Electricity from qualified nuclear power facilities
U.S. Code: 26 U.S. Code §45U
Duration: 2024-2032
Period of availability: Available for electricity produced and sold after 12/31/23, in tax years beginning after that date. Not available for tax years beginning after 12/31/32
Stackability and limitations:
- Cannot claim §45J credit
- Credit subject to “reduction amount” depending on the amount of energy produced and the gross receipts of the facility
- Payments from federal, state, or local zero-emission nuclear subsidies reduce the credit amount
Inflation adjustment: Subject to annual inflation adjustment
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Not applicable
Rates
- Base rate: $3.00 per MWh, subject to “reduction amount” depending on the amount of energy produced and the gross receipts of the facility
- Full rate: 15.00 per MWh, subject to “reduction amount” depending on the amount of energy produced and the gross receipts of the facility. Apprenticeship requirements do not apply to §45U to receive the full rate
Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§45Q PTC - Credit for carbon oxide sequestration
Funding mechanism: Production tax credit
Technology grouping: Electricity
IRA Section: 13104
New or existing: Existing - extended and modified
Eligibility: The §45Q PTC is for carbon dioxide sequestration coupled with permitted end uses within the U.S.
U.S. Code: 26 U.S. Code §45Q
Duration: 12 years from the date facility is placed in service
Period of availability: Facilities must be placed in service before 2033
Stackability and limitations:
- Limited to U.S. facilities with minimum capture volumes:
- 1,000 metric tons of CO2 per year for direct air capture (DAC) facilities
- 18,750 metric tons for electricity-generating facilities with carbon capture capacity of 75% of baseline CO2 production
- 12,500 metric tons for any other facility
- Cannot be stacked with §45V, §45Z, §48, §48C, or §48E
Inflation adjustment: Subject to annual inflation adjustment
Elective pay (direct pay): Available to tax-exempt entities. Available to non-tax-exempt entities for up to five years. If a non-tax-exempt entity selects elective pay, such entity “shall be treated as having made such election for each of the four succeeding tax years.” During the five-year period, a non-taxexempt entity “may elect to revoke the application” of elective pay for the remainder of the five-year period. The non-taxexempt entity cannot “subsequently revoke” the elective pay revocation
Recapture: Subject to recapture if qualified carbon ceases to be captured, disposed of, or used as a tertiary injectant. Recapture period is three years, starting from first injection for disposal in secure geological storage or use as a tertiary injectant. Any recapture amount will be accounted for in the tax year that it’s identified and reported
Rates
- Base rate: $17/metric ton of carbon dioxide captured and sequestered ($36 for DAC facilities). $12/metric ton for carbon dioxide that is injected for enhanced oil recovery or utilized ($26 for DAC facilities)
- Full rate: $85/metric ton of carbon dioxide captured and sequestered ($180 for DAC facilities). $60/metric ton for carbon dioxide that is injected for enhanced oil recovery or utilized ($130 for DAC facilities)
Guidance (since passage of the IRA):
- Notice 2022-57: Request for comments on the Credit for Carbon Oxide Sequestration (11/3/2022)
- Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§45Z PTC – Clean fuel production tax credit
Funding mechanism: Production tax credit
Technology grouping: Fuels
IRA Section: 13204
New or existing: New
Eligibility: The §45Z PTC is for the domestic production of clean transportation fuels, including sustainable aviation fuels. Fuels with less than 50 kilograms of carbon dioxide equivalent per million British thermal units (CO2e per mmBTU) qualify as clean fuels eligible for credits
U.S. Code: 26 U.S. Code §45Z
Duration: 3 years
Period of availability: Available for fuels produced after 2024 and used or sold before 2028
Stackability and limitations:
- Producers must be registered as a producer of clean fuel under section 4101
- Fuels must be produced in the U.S.
- To be considered "clean," fuels must emit no more than 50 kilograms of carbon dioxide equivalent per one million British thermal units (CO2e per mmBTU)
- "Transportation fuels" must be deemed "suitable for use as a fuel in a highway vehicle or aircraft"
- Cannot be stacked with §45V or §45Q
Inflation adjustment: Subject to an annual inflation adjustment
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Not applicable
Rates
- Base rate: $0.20/gallon for non-aviation fuel and $0.35/gallon for aviation fuel, multiplied by the emissions factor of the fuel
- Full rate: $1.00/gallon for non-aviation fuel and $1.75/gallon for aviation fuel, multiplied by the emissions factor of the fuel
Guidance:
- Notice 2022-58: Request for Comments on Credits for Clean Hydrogen and Clean Fuel Production (11/3/2022)
- Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§45V PTC – Clean hydrogen production tax credit
Funding mechanism: Production tax credit
Technology grouping: Fuels
IRA Section: 13204
New or existing: New
Eligibility: The §45V PTC is for the production of clean hydrogen at a qualified clean hydrogen facility
U.S. Code: 26 U.S. Code §45V
Duration: 10 years from the date the project is placed in service
Period of availability: Credit is for hydrogen produced after 12/31/22. Credit is available for facilities placed in service before 1/1/33
Stackability and limitations:
- Producers must be in the U.S.
- The project developer can make a non-irrevocable election for an ITC (instead of the 45V PTC) as long as the project has not claimed the 45Q PTC for carbon sequestration
- Cannot be stacked with §45Q, §45Z, or §48C
Inflation adjustment: Subject to an annual inflation adjustment
Elective pay (direct pay): Available to tax-exempt entities. Available to non-tax-exempt entities for up to five years
If a non-tax-exempt entity selects elective pay, such entity “shall be treated as having made such election for each of the four succeeding tax years.” During the five-year period, a non-taxexempt entity “may elect to revoke the application” of elective pay for the remainder of the five-year period. The non-tax-exempt entity cannot “subsequently revoke” the elective pay
revocation
Recapture: Not applicable
Rates
- Base rate: $0.60/kg multiplied by the applicable percentage. The applicable percentage ranges from 20% to 100% depending on lifecycle greenhouse gas emissions
- Full rate: $3.00/kg multiplied by the applicable percentage. The applicable percentage ranges from 20% to 100% depending on lifecycle greenhouse gas emissions
Guidance:
- Notice 2022-58: Request for Comments on Credits for Clean Hydrogen and Clean Fuel Production (11/3/2022)
- Notice of proposed rulemaking: Section 45V Credit for Production of Clean Hydrogen; Section 48(a)(15) Election to Treat Clean Hydrogen Production Facilities as Energy Property (12/21/2023)
- Final rule pending
§48C ITC – Advanced energy project credit
Funding mechanism: Investment tax credit
Technology grouping: Manufacturing
IRA Section: 13501
New or existing: Existing – modified and extended
Eligibility: For investments in advanced energy projects, as defined in §48C(c)(1). A project that:
- Re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of a range of clean energy equipment and vehicles
- Re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent
- Re-equips, expands, or establishes an industrial facility for the processing, refining, or recycling of critical materials
U.S. Code: 26 U.S. Code §48C
Period of availability: §48C is an allocated credit. It is available when the application and certification process begins and ends when the credit is fully allocated. Projects must be placed in service within two years of application approval and certification
Stackability and limitations:
- Allocated credit subject to $10 billion cap. At least $4 billion must be allocated to energy communities
- Cannot be stacked with §45X, §48, §48E, §45Q, or §45V
Inflation adjustment: None
Elective pay (direct pay): Only available to tax-exempt entities
Recapture: Subject to recapture per §50
Rates
- Base rate: 6%
- Full rate: 30%
Guidance (since passage of the IRA):
- Notice 2023-18: Initial Guidance for Qualifying Advanced Energy Project Credit Allocation Program Under Section 48C(e) (2/13/2023)
- Notice 2023-44: Additional Guidance for Qualifying Advanced Energy Project Credit Allocation Program Under Section 48C(e) (5/31/2023)
- Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
§45X PTC – Advanced manufacturing production credit
Funding mechanism: Production tax credit
Technology grouping: Manufacturing
New or existing: New
IRA Section: 13502
Eligibility: The §45X PTC is for domestic manufacturing of components for solar and wind energy, inverters, battery components, and critical minerals
U.S. Code: 26 U.S. Code §45X
Duration: 2023-2032
Period of availability: Credit for critical materials is permanent starting in 2023. For other components, credit phases down over 2030-2032
Stackability and limitations:
- Production of eligible components must be in the U.S.
- Property must be sold to an unrelated party unless making an election under §45X(a)(3)(b)
- Cannot claim §45X credit for property produced at facilities that received the §48C credit
- Credit is subject to a phase-out beginning in 2030 (75%, 50%, 25%, 0%), except for critical minerals
Inflation adjustment: Although §45X is a PTC, the credit is not inflation-adjusted
Elective pay (direct pay): Available to tax-exempt entities. Available to non-tax-exempt entities for up to five years
If a non-tax-exempt entity selects elective pay, such entity “shall be treated as having made such election for each of the four succeeding tax years.” During the five-year period, a non-tax-exempt entity “may elect to revoke the application” of elective pay for the remainder of the five-year period. The non-tax-exempt entity cannot “subsequently revoke” the elective pay revocation
Recapture: Not applicable
Guidance:
- Notice of proposed rulemaking and public hearing (12/15/2023)
- Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan
Rates: Rates for the §45X PTC are component-specific and listed on IRS Form 7207. §45X does not have a PWA requirement
Solar energy components
Eligible Component | Value per Unit | Unit |
---|---|---|
Thin film or crystalline photovoltaic cell | $0.04 | Capacity in Wdc |
Photovoltaic wafer | $12.00 | Square meter |
Solar-grade polysilicon | $3.00 | Kilogram |
Polymeric backsheet | $0.40 | Square meter |
Solar module | $0.07 | Capacity in Wdc |
Wind energy components
Eligible Component | Value per Unit | Unit |
---|---|---|
Related offshore wind vessel | 10% | Sales price of vessel |
Blade | $0.02 | Total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed |
Nacelle | $0.05 | Total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed |
Tower | $0.03 | Total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed |
Offshore wind foundation using fixed platform | $0.02 | Total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed |
Offshore wind foundation using floating platform | $0.04 | Total rated capacity (expressed on a per watt basis) of the completed wind turbine for which such component is designed |
Torque tube and structural fastener components
Eligible Component | Value per Unit | Unit |
---|---|---|
Torque tube | $0.87 | Kilogram |
Structural fastener | $2.28 | Kilogram |
Inverter components
Eligible Component | Value per Unit | Unit |
---|---|---|
Central inverter | $0.0025 | Capacity in Wac |
Utility inverter | $0.015 | Capacity in Wac |
Commercial inverter | $0.02 | Capacity in Wac |
Residential inverter | $0.065 | Capacity in Wac |
Microinverter or distributed wind inverter | $0.11 | Capacity in Wac |
Electrode active materials
Eligible Component | Value per Unit | Unit |
---|---|---|
Electrode active materials | 10% | Costs incurrred by the taxpayer with respect to the production of electrode active materials |
Battery components
Eligible Component | Value per Unit | Unit |
---|---|---|
Battery cell | $35.00 | Capacity in kWh (limitations apply - see instructions to IRS Form 7207 |
Battery module which uses battery cells | $10.00 | Capacity in kWh (limitations apply - see instructions to IRS Form 7207 |
Battery module which does not uses battery cells | $45.00 | Capacity in kWh (limitations apply - see instructions to IRS Form 7207 |
Critical minerals
Eligible Component | Value per Unit | Unit |
---|---|---|
Applicable critical minerals | 10% | Costs incurrred by the taxpayer with respect to the production of such minerals |
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Executive summary
Transferable tax credits are sold at a discount to face value, providing attractive financial benefits to corporate investors. They are not without risk, however, and tax credit buyers should have a clear sense of how to identify, track, and mitigate relevant risks.
At the same time, clean energy developers should understand the scope of due diligence during a tax credit transfer.
This due diligence checklist and documentation guide gives tax credit buyers, sellers, and their respective advisors a set of shared expectations on the required analysis and documentation for §48 investment tax credits.
To download a PDF version of this guide, please visit our resources page.
Jump to a due diligence category
- Transaction overview
- Major deal participants
- Seller diligence
- Qualification
- Structure
- Recapture (qualified energy facility, change in ownership)
- Prevailing wage and apprenticeship requirements (compliance, exemption)
- Bonus credits (domestic content, energy community, low-income community)
- Tax credit insurance
Transaction overview
The transaction overview should include an overall description of the transaction, including:
- Brief description of sponsor
- Technology
- Project size in MW AC, location, and description
- Placed in service (PIS) date
- Eligible cost basis
- Resulting ITC credit amount
- Description of tax credit percentage, including bonus credit adders and compliance with, or exemption from, prevailing wage and apprenticeship requirements
- Details on how the project is financed
Major deal participants
Tax credit transfers involve a range of stakeholders on the buy- and sell-sides, all of whom should be memorialized for reference during the five-year recapture period.
Diligence item | Discussion |
---|---|
Seller | Name of company, principal place of business |
Guarantor | Name of company, principal place of business, relationship to Seller |
Offtaker | Entity that purchases power from the Project |
Seller counsel | Name of company, POC |
Tax credit insurance broker | Name of company, POC |
Tax credit insurer | Name of company, POC |
Seller diligence
Diligence item | Discussion |
---|---|
Organization chart | Summary of Seller and related entities, including ownership percentages and federal tax treatment (e.g., partnership, C-corporation, disregarded entity, etc.). |
Affiliate transactions | Buyer should investigate whether fees included in the cost basis are from affiliate transactions. For example, the EPC fee may not be eligible for inclusion in the Project’s cost basis if the EPC is an affiliate of the Seller. |
Organizational documents | Corporate documentation of the project company (if applicable), Seller, and the guarantor (if applicable). |
Financial statements | [Audited] financial statements of the Seller and/or Guarantor, for purposes of understanding the financial strength of Seller and/or Guarantor and its ability to fulfill indemnification obligations. If the financial strength of Seller is in doubt (e.g., if the indemnity is not provided by a creditworthy guarantor), then Buyer or Seller can also procure tax credit insurance from an investment grade insurer. |
Fiscal year end | The Seller’s fiscal year end will impact the tax year in which the Buyer can take the credit. |
Upstream ownership | If Seller is not a widely held C-corporation, Buyer should perform diligence on whether Seller is subject to at risk rules of Section 49. Ensure that any project financing in place does not limit Seller’s ability to sell credits. |
Tax return filing date | Understand timing of when Seller intends to file. This may impact the timing of when a transaction needs to be closed (e.g., if Seller is planning to file taxes by April 15, Seller will want to close the transaction in advance of filing). |
Legal actions | Buyer will confirm that there is no ongoing or pending legal action or notice of legal action concerning the Project. |
Qualification
Buyer should validate that the Project qualifies for the §48 tax credit. Buyer should ensure that the Project qualifies as energy property, the proper cost basis is used, and that the Project was placed in service in the appropriate tax year.
Diligence item | Discussion |
---|---|
Description of asset/project | Brief overall description of the Project. |
Begun construction date | Begun construction date only needs to be investigated in certain situations, such as when the Project claims exemption from prevailing wage and apprenticeship requirements due to construction starting prior to January 29, 2023. If a certain “begun construction” date is claimed, Buyer should look for documentation on how safe harbors were met (e.g., 5% test or physical work test). |
Placed in service date | Buyer should validate when the Project was placed in service, to ensure that credits are applicable to the desired tax year. The IRS and various courts consider five tests to determine when a project was placed in service. The Seller should ideally provide evidence that all five tests are met: (1) the receipt of required licenses and permits; (2) the passage of control of the facility to the ultimate taxpayer; (3) the completion of critical tests; (4) the commencement of regular operations; and (5) the synchronization of the facility into a power grid for generating electricity to produce income. |
Cost segregation study | Buyer should ensure that the cost basis for purposes of calculating a §48 ITC is validated through a cost segregation study (and section 1060 analysis, if applicable) from a reputable accounting firm with energy project experience. |
EPC/installation contracts documentation | Buyer should review the Seller’s Equipment, Procurement, and Construction (EPC) contract(s). Buyer should validate that the primary EPC and the subcontractors are not related to the Seller, as fees charged by a related entity may not be valid for purposes of calculating cost basis for a §48 ITC. The EPC contract will also need to include representations and warranties around compliance and documentation with respect to prevailing wage and apprenticeship requirements for both employees and subcontractors if the Project is not exempt from PWA requirements. |
Appraisal | In certain cases, especially when there is a step-up in cost basis for purposes of calculating a §48 ITC, Buyer should ensure that an appraisal is performed by a qualified third-party valuation firm. Buyer should ensure that the Project’s cost basis falls within the range of the appraised fair market value (FMV) based on a reasonable analysis of cost, income, and market approaches to valuation. Buyer should request a copy of the appraisal and form reliance letter. |
Transfer filing and registration | Buyer should obtain a copy of transfer filing documentation with registration number(s) for the Project(s). |
Structure
Buyer should validate that Seller is an eligible transferor, and that the Seller’s underlying legal structure will be respected by the IRS.
Diligence item | Discussion |
---|---|
Structure documentation | Buyer should validate that the Seller is entitled to claim and to transfer the tax credits and that the Seller’s legal structure (e.g., sale leaseback, partnership) will be respected by the IRS. For example, a clean energy project company might be sold to a joint venture with ownership from an arms-length third party, to effectuate a “step-up” in the cost basis for purposes of calculating the §48 tax credit. Buyer should ensure that the Seller entity has sufficient equity ownership from an arms-length third party, and that the third party is a true equity owner (with both upside and downside risk). Buyer should also validate that the JV is eligible to claim and to transfer the tax credits. A legal firm can provide a memo on validity of structure. |
Recapture
To avoid recapture, a §48 ITC requires that (1) the property remains qualified energy property for five years and (2) there is no change in ownership of the property for five years. If a project fails to meet these requirements, the IRS will recapture the unvested portion of the ITC.
The ITC vests equally over a five-year period, meaning 20% of the total ITCs claimed will vest on each anniversary of Project’s placed in service date.
Qualified energy facility
A property can cease to be qualified energy property when an asset is disposed of, or otherwise ceases to be investment credit property to the eligible taxpayer during the recapture period. For example, the asset is:
- Destroyed and not rebuilt and placed back in service
- Abandoned
- Repurposed to sell something other than electricity derived from the qualified generation asset
Key risk mitigation measures include sufficient property and casualty insurance, adequate site control and interconnection rights, and identification of alternatives in the event of an Offtaker default.
Diligence item | Discussion |
---|---|
Site control documentation | Buyer should validate that the Project has an unencumbered right to operate on the site during the five-year recapture period. If the site is leased, a recorded lease with title insurance may improve Buyer comfort that the site is secure. If the Project cannot be moved, Buyer should also confirm there are no environmental issues on the site that could materially impact Project operations. Environmental issues are typically flagged in a Phase I environmental site assessment report with a map and/or description of any Recognized Environmental Condition located on the site. |
Interconnection documentation | Buyer should confirm that the Project has approval for interconnection during the five-year recapture period. |
O&M contracts documentation | §48 ITCs are subject to recapture if the project is placed out of service during the five-year recapture period. Buyer should review the O&M contract to ensure that the Project will be adequately maintained. The O&M contract will also need to include covenants around compliance and documentation with respect to prevailing wage and apprenticeship requirements unless the Project is exempt from prevailing wage and apprenticeship requirements. |
Property and casualty insurance | Buyer should validate that Property and Casualty insurance is in place, and that coverage is high enough for the Seller to rebuild the Project in the event of a P&C event. If the Project is taken out of service due to a P&C event, the §48 ITC may be subject to recapture. |
Offtake/revenue contract | As §48 ITCs are subject to recapture if the Project is placed out of service during the five-year recapture period, Buyer should validate that the Project will earn sufficient revenues during the recapture period to continue operating. If electricity is being sold on a merchant basis, Buyer should validate that the Project has the ability to sell electricity to the grid. If electricity is sold to a separate power purchaser, Buyer should review the Seller’s power purchase agreement or similar contract, diligence the ability of the power purchaser to fulfill contractual obligations and understand alternative revenue sources if the power purchaser is unable to pay. |
Change in ownership
A change in ownership can occur if the project owner transfers its ownership of the facility during the five-year recapture period. If a lender has a collateral interest in the project company, a foreclosure can trigger recapture due to change in ownership.
Key risk mitigation measures include a forbearance agreement with lenders, structuring the debt in a way that foreclosure will not trigger a recapture, and indemnification from the seller.
Diligence item | Discussion |
---|---|
Project financing documentation | Buyer should confirm there is no tax-exempt financing for the Project. Buyer should also confirm if there is any financing agreement where such lenders or other financing parties have collateral security in the Project or in any intermediate holding company between the project company and Seller. If a change in ownership is triggered by a foreclosure during the recapture period, the unvested portion of the §48 ITC will be subject to recapture. Ideally, debt should be structured in a way that a foreclosure will not result in a recapture, or a forbearance agreement should be in place with lenders. |
Prevailing wage and apprenticeship requirements
Buyer should validate that the Project is exempt from, or compliant with, prevailing wage and apprenticeship requirements. Prevailing wage rules require that certain workers are paid a minimum prevailing wages specified by the U.S. Department of Labor during the construction of a facility or property, and during alteration or repair of a facility or property for a certain number of years after the project is placed in service.
Buyers should require proper documentation that the correct wage was paid.
Exempt from PWA
Diligence item | Discussion |
---|---|
Prevailing wage and apprenticeship | Project is exempt from PWA requirements under two scenarios:
|
Compliant with PWA
Diligence item | Discussion |
---|---|
Prevailing wage and apprenticeship | If Project requires compliance with PWA, Buyer should validate that proper documentation was collected, including payroll records for each laborer and mechanic (including each qualified apprentice) employed by the taxpayer, contractor, or subcontractor employed. Buyer should review the representations and warranties in the contract with the primary EPC (and potentially with their subcontractors) to validate that all parties will comply with PWA requirements. The IRS also recommends collecting additional documentation, which are listed in proposed regulations §1.45-12(b) and (c) and can be requested by Buyer to further validate PWA documentation practices. |
Bonus credits
If a Project claims a bonus credit adder (domestic content, low-income community, or energy community), the Buyer should substantiate that the Project qualifies for the relevant bonus credit adder.
Domestic content
Diligence item | Discussion |
---|---|
Domestic content | If Project claims the domestic content bonus adder, Buyer should verify supporting cost analysis from a third-party engineer, and/or supporting documentation from legal counsel. If the Seller utilized the domestic content safe harbor under IRS Notice 2024-41, Buyer will want to validate the developer’s safe harbor calculations, collect documentation confirming the sourcing of components and sub-components included in the calculations, and view the developer’s safe harbor certification. In many cases, a legal memorandum may be prepared by seller counsel to analyze and confirm compliance with domestic content requirements. |
Energy community
Diligence item | Discussion |
---|---|
Energy community | If Project claims the energy community bonus adder, Buyer should verify documentation that Project is located in the “Brownfield Category, the Statistical Area Category, or the Coal Closure Category” as described in IRS Notice 2024-30. For §48 and §48E ITCs, eligibility for the energy community bonus credit is determined on the date that the Project is placed in service, and in the event the Project is only partially located in an energy community, the following guidance applies:
|
Low-income community
Diligence item | Discussion |
---|---|
Low-income community | If the Project claims the low-income community bonus adder, Buyer should verify that the Project received an acceptance/allocation notice from the IRS as well as confirmation that the project was placed in service within a statutorily set four-year period. To validate that the project was properly placed in service, the developer must provide documentation and make attestations in the DOE low-income community application portal. |
Tax credit insurance
If a Seller is unable to offer an indemnity from a creditworthy guarantor, tax credit insurance is commonly purchased to provide additional risk mitigation in the event of a disallowance or recapture of credits.
There is a robust market for tax credit insurance, which has been utilized on tax equity transactions for over a decade. Tax Credit Insurance Brokers can help place insurance with a wide selection of investment-grade insurance carriers.
Diligence item | Discussion |
---|---|
Tax credit insurance |
Buyer should validate that tax credit insurance covers desired risks, which potentially include:
|
Download Reunion's Section 48 ITC due diligence guide
To download Reunion's Section 48 due diligence guide in PDF format, please visit our resources page.
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Our data
- Quarter: The quarter in which the deal closed. Occassionally, deals are announced in the quarter after which they closed.
- Credit: The type of credit(s) involved in the transaction. Although most transactions involve a single credit type, like a §48 ITC, some deals involve multiple credits.
- Technology: The clean energy technology, like commerical and industrial solar or battery storage, behind the transaction. Emerging technologies, like hydrogen, can meaningfully impact pricing.
- Amount: A deal's amount represents the total, lifetime value of the transaction. When a range is provided – for instance, Broadwind's estimate of $12M to $14M per year – we use the lower bound.
- Source: The primary source from which we collected transactions data. In some instances, we rely on multiple sources for the data we've presented.
We generally post announcements from tax credit sellers to prevent duplication of transactions.
Publicly announced IRA clean energy tax credit transfer deals
Quarter | Credit | Technology | Amount ($M) | Source |
---|---|---|---|---|
23 Q4 | §48 ITC | Solar | Undisclosed | Advanced Power |
23 Q4 | §45 PTC | Utility solar | $300 | Ashtrom |
23 Q3 | §45 PTC | Wind, utility solar | $580 | Invenergy |
23 Q3 | §45 PTC | Wind | $100 | Avangrid |
23 Q4 | §48 ITC | Rooftop solar | $1 | Davis Hill |
23 Q4 | §48 ITC | Battery storage | $60 | Energy Vault |
23 Q4 | §48 ITC, §45 PTC | Solar, battery storage | $191 | Arevon |
24 Q1 | §45 PTC | Solar | $500 | Vesper Energy |
23 Q4 | §45X AMPC | Advanced manufacturing | $24 | Broadwind |
23 Q3 | §48 ITC | Biogas | $53 | Aemetis |
24 Q1 | §45 PTC | Utility solar | Undisclosed | Matrix Renewables |
24 Q1 | §45Q PTC | Carbon capture | $9 (est.) | Capture Point |
23 Q1 | §45Q PTC | Carbon capture | $40 | CVR Partners |
24 Q1 | §48 ITC | Battery storage | Undisclosed | Arevon |
24 Q1 | §48 ITC | Battery storage | Undisclosed | KCE |
24 Q1 | §48 ITC | Battery storage | Undisclosed | GridStor |
24 Q1 | §48 ITC | Biogas | $39 | Virentis |
23 Q4 | §48 ITC | Biogas | $15 | Anaergia |
24 Q1 | §45 PTC | Wind | $430 | TransAlta |
23 Q4 | §45 PTC | Wind | $24 | PGE |
23 Q4 | §48 ITC | Fuel cell | $7 | Fuel Cell Energy |
23 Q3 | §48 ITC | Solar | $145 | Sunnova |
24 Q2 | §45X AMPC | Advanced manufacturing | Undisclosed | Silfab Solar |
24 Q3 | §45X AMPC | Advanced manufacturing | $50 | Heliene |
Submit a transaction
If you know of a tax credit transfer that is not on our list, please contact us. We want to keep our list up-to-date.
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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.
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