What Tax Credit Buyers and Sellers Can Expect in a Section 48 ITC Due Diligence Package
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.
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.
Seller diligence
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.
Structure
Buyer should validate that Seller is an eligible transferor, and that the Seller’s underlying legal structure will be respected by the IRS.
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.
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.
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
Compliant with PWA
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
Energy community
Low-income community
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.
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
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.
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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Transferable tax credits are a powerful tool for profitable companies looking to manage their federal tax liability. When buying transferable tax credits, however, companies must consider their tax year-end in conjunction with that of the seller in order to claim the credits correctly and to the greatest extent possible.
IRC §6418(d) dictates tax credit purchase timing between buyers and sellers
Internal Revenue Code §6418(d) explains the specific rule relating to the relationship between a buyer’s (transferee taxpayer) and seller’s (eligible taxpayer) tax year-ends.
"In the case of any credit (or portion thereof) with respect to which an election is made under subsection (a), such credit shall be taken into account in the first taxable year of the transferee taxpayer ending with, or after, the taxable year of the eligible taxpayer with respect to which the credit was determined."
Corporate taxpayers will face one of three scenarios when engaging tax credit sellers
Scenario 1: Buyer and seller both have a calendar year-end
For transactions where both the buyer and seller have a 12/31 tax year-end date, the credits simply apply to the tax year in which they were generated.
Scenario 2: Buyer's tax year ends before that of the seller
For a transaction where the buyer tax year ends before that of the seller – for example, the buyer has a 9/30 tax year, and the seller has a 12/31 tax year – any credits generated in the same calendar year are pushed into the next tax year for the buyer.
Scenario 3: Buyer's tax year ends after that of the seller
Lastly, for a transaction where the seller's tax year ends before that of the buyer, credits generated prior to the end of the seller tax year will apply to the current calendar year, but credits generated after the end of the seller tax year will push into the next calendar year.
Most eligible corporate taxpayers are calendar-year filers
There are approximately 600 publicly traded companies in the U.S. with a trailing 12-month income tax liability over $100M (as of May 2024).
Of these companies, 78% are calendar-year filers, while another 8.0% close out their fiscal year in February or September.
If we increase the threshold to $500M of trailing 12-month income tax liability, the numbers remain consistent: 78.2% of companies are calendar-year filers.
Find credits that complement your company's tax year-end
To find clean energy tax credits that complement your company's tax year-end, please contact Reunion's transactions team. In addition to providing access to our tax credit marketplace, we can curate a list of projects that most closely align with your needs.
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