Is it Possible for a Non-Profit to Trade Tax Credits?

On April 25, the Treasury and IRS published final regulations for the Inflation Reduction Act’s tax credit transfer mechanism. The IRS also published a press release and updated their transferability FAQs.

The final regulations carried few surprises – other than, perhaps, arriving earlier than some market participants predicted – and preserved the status quo set by the June 2023 guidance.

At Reunion, we welcomed this "non-event" and the clarity it provided, and wanted to highlight several key consistencies.

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Highlights from the final regulations

Individuals, trusts, estates, and closely held C corporations remain largely on the sidelines

Despite “many comments” calling for a change, widely held C corporations will remain the primary buyers of transferable tax credits. While this decision will likely decrease overall liquidity in the tax credit market, it will also limit the potential for fraud and abuse.

Passive activity rules generally limit individuals, trusts, estates, and closely held C corporations to applying transferable tax credits to passive income – not active income. The final regulations did not adjust this stance. (However, a potential exception exists for certain closely held C corporations, which allows them to offset active income with tax credits.)

Deprecation cannot be transferred

The IRS did not change its stance on depreciation. As the FAQ states, “Only a taxpayer that has an ownership interest in the project may claim tax depreciation. Transferability does not allow depreciation benefits to be transferred.”

Bonus credits cannot be sold separately

The IRA created three bonus, or adder, credits, which can increase the value of a clean energy project’s tax credits:

• Energy communities
• Low-income communities
• Domestic content

The Treasury’s June guidance stated that bonus credits cannot be sold separately from a project’s other credits. A developer cannot, in other words, sell its base credits to one company and its bonus credits – perhaps at a different price per credit – to another company.

Instead, all credits must be sold as “vertical slices” and be pari passu to one another. In practice, if a single project has multiple buyers for its credits, all buyers have the same risk exposure.

April’s regulations did not change the Treasury’s position. 

The "intends to purchase" provision remains unchanged

Tax credit buyers can still "take into account a specified credit portion that it has purchased, or intends to purchase, to calculate its estimated tax payments." Of course, buyers remain liable for any underpayments.

The regulations clarified that the "intends to purchase" language "illustrates that all the requirements of proposed §1.6418-2(b) do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations."

Generators of §45X, §45V, and §45Q credits can make facility-specific elections for transferability or direct pay

An advanced manufacturer’s decision to use transferability or direct pay to monetize their §45X tax credits need not be binary. If a manufacturer has multiple facilities, they can make the transferability-or-direct-pay decision at the facility level. If a manufacturer only has one facility, however, their decision is binary.

The same optionality holds true for the §45V PTC for clean hydrogen and §45Q PTC carbon capture, although the timing of the election varies by credit:

• §45V PTC: The direct pay/transfer election is made during the taxable year the qualified clean hydrogen production facility is placed in service
• §45Q PTC: The direct pay/transfer election is made during the taxable year the “single process train” is placed in service 
• §45X AMPC: The direct pay/transfer election is made during the taxable year in which eligible components are produced

Importantly, because the §45X election is made during the taxable year in which an eligible component is produced, production facilities that predated the IRS may be eligible for the credit.

Advanced cash payments for multi-year PTCs are not permitted – but borrowing against expected future tax credit payments is permitted

Although “upfront payments for PTCs determined in future taxable years are standard in tax equity transactions,” the final regulations stated that transferred PTCs must be paid for in cash one year at a time. This holds true for ten- and 12-year PTCs. 

Permitting advanced payments would “raise several complex legal and administrative issues, such as whether an excessive credit transfer has occurred or if the eligible taxpayer has gross income if prepaid eligible credits were not transferred in a later tax year."

On an encouraging note, the final regulations specifically state that “there is no prohibition on either a transferee taxpayer” – that is, a tax credit buyer – “or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement.” 

Intermediaries can serve as brokers but not dealers

The final regulations, unsurprisingly, left unaltered the assumed role of tax credit intermediaries (like Reunion) in the transferability market. Intermediaries can serve as brokers and facilitators in tax credit transfers, helping to match and advise buyers and sellers. 

Intermediaries cannot, however, serve as dealers, effectively taking ownership of a tax credit with the intent of transferring/selling it again. 

“Required minimum documentation” remains the same

The final regulations acknowledge calls for an increase to the amount of required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer to make a valid transfer. 

Nonetheless, the Treasury and IRS left the required minimum unchanged. Perhaps as a nod to the validity of increasing the required minimum, the final regulations remind market participants that, “...while the required minimum documentation requirements are the same for all taxpayers, any particular agreement between an eligible taxpayer and transferee taxpayer may go beyond the required minimum documentation based on the arrangement of the parties. The proposed regulations allowed sufficient flexibility for market participants to determine if more information is necessary in a particular transaction, while balancing the burden of producing the required minimum documentation required to make a transfer election.”

The final regulations also remind market participants that "§6418(g)(2)(B) specifically places a due diligence responsibility on the transferee taxpayer."

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Improvements likely coming to the pre-registration portal

The IRS opened the tax credit pre-registration portal in December to significant fanfare. But, as with any brand-new IT system, there have been calls for improvement.

While the IRS would not commit to set application review times, it left the door open to "continue to review the efficiency of the registration portal, including functionality responses from the public, to determine whether changes should be implemented or whether additional guidance or publications should be issued."

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Plenty more guidance to come in the next 20-ish business days

In Norton Rose Fulbright’s annual Cost of Capital call, the panelists aptly brought attention to the Congressional Review Act, which “is a tool Congress can use to overturn certain federal agency actions.”

With respect to the Inflation Reduction Act, an incoming Congress (backed by a Trump administration) could use the CRA to unwind IRA regulations that were issued within 60 legislative days of the previous Congress.  

Although the exact date for the beginning of the 60-day window remains to be seen, it’s potentially in late May or early June. This gives the Treasury and IRS a little over 20 business days to issue a backlog of IRA-related guidance and regulations. 

The IRS 2023-2024 Priority Guidance Plan details what guidance the IRS is prioritizing through the end of the plan year, which is June 30, 2024.

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Discuss the regulations with Reunion

Please contact Reunion's transactions team to understand how these final regulations could impact your organization's plans to purchase clean energy tax credits.

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Reunion is excited to host quarterly “office hours” for clean energy developers who would like to learn more about our marketplace and get a pulse on the overall transferability market.

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We'll hold office hours on a quarterly basis

We will generally hold office hours on a quarterly basis and open registration one or two months in advance. Each session will be limited to 50 developers on a first-come, first-served basis.

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Designed for clean energy developers and manufacturers

Our office hours are designed for clean energy developers and manufacturers who have transferred, or are planning to transfer, IRA tax credits over the next 12 months. Developers need not have projects in Reunion's marketplace to participate.

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Co-hosted by Reunion's founders

Reunion's founders, Billy Lee and Andy Moon, will co-host the hour-long sessions.

Billy and Andy pioneered solar financing structures with tax equity and private equity investors, leading some of the first solar transactions with institutions such as US Bank, JP Morgan, Wells Fargo, Bank of America, Key Bank, PNC, Nord/LB, D.E. Shaw, and First Reserve.

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Questions welcome!

We want our office hours to be interactive, so please bring any questions you have, whether related to current market conditions, pricing, or commercial terms.

You're welcome to ask questions beforehand.

The latest energy community guidance, which meaningfully expanded the number of qualifying areas, placed the 10% adder back in the spotlight for the transferable tax credit marketplace. At the same time, Reunion has observed a marked increase in the number of projects in our marketplace claiming the energy community bonus.

While our transferable tax credit handbook goes deep on energy communities, we wanted to share a comprehensive (and refreshed) look at the adder.

Our guide begins with the basics, so we invite you to jump ahead.

• Background and scope
• Credit and project eligibility
• Diligence
• Guidance
• Annual updates to areas qualifying as energy communities
• Resources

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The Inflation Reduction Act created three bonus credits, or "adders"

The Inflation Reduction Act (IRA) created three "bonus" credits that can increase the value of a clean energy project's transferable tax credits:

• Domestic content: 10% bonus
• Energy community: 10% bonus
• Low-income community: 10% or 20% bonus

The energy community adder provides a 10% bonus credit

The energy community bonus provides a 10% increase to a project's credit value if the underlying project is located in an energy community (and meets prevailing wage and apprenticeship requirements).

A utility-scale solar project, for instance, that meets PWA requirements would receive tax credits worth 30% of its eligible cost basis. If the same project is located in an energy community, it would receive tax credits worth 40% of its eligible basis.

The IRA defines three types of energy communities

To qualify for the energy community bonus, a project must be located in at least one of three energy community "categories."

Category 1: Brownfield

‍A brownfield site is defined in 42 U.S.C. § 9601(39)(A) as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant" (as defined under 42 U.S.C. § 9601), and includes certain "mine-scarred land" (as defined in 42 U.S.C. § 9601(39)(D)(ii)(III)). A Brownfield site does not include the categories of property described in 42 U.S.C. § 9601(39)(B).

Three types of sites qualify as a brownfield under a safe harbor:

• Existing brownfield: Brownfields that are already tracked by a federal, state, territorial, or federally-recognized Indian tribal brownfields program. Many states, like Idaho and New York, have their own brownfields programs with supporting maps. A valid brownfield site could be tracked by a state program but not a federal program, and vice versa
• Phase II assessment: A Phase II Assessment has been completed with respect to the site and such Phase II Assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. § 9601(14), or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33)
• Phase 1 assessment (for projects with a nameplate capacity of not greater than 5MWac): A Phase I Assessment has been completed with respect to the site and such Phase I Assessment identifies the presence or potential presence on the site of a hazardous substance, or a pollutant or contaminant.

Category 2: Coal closure

A census tract (or directly adjoining census tract): 

• in which a coal mine has closed after 1999; or
• in which a coal-fired electric generating unit has been retired after 2009

Category 3: Statistical area

A "metropolitan statistical area" (MSA) or "non-metropolitan statistical area" (non-MSA) that has (or had at any time after 2009):

• 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
• has an unemployment rate or above the national average unemployment rate for the previous year

The scope of "direct employment" is determined by ten NAICS codes.

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No double bonus for multiple energy communities

If a clean energy project is located in two energy communities – a brownfield site within a coal community, for instance – the bonus remains 10%. Developers cannot double up.

Bonus credits cannot be sold in stand-alone tranches

Bonus credits are not treated differently from base credits for the purpose of transferability. Treasury guidance released in June 2023 specified that all transferable credits must be sold as “vertical slices” and be pari passu to one another, as opposed to “horizontally” bifurcating bonus credits from base credits.

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Four IRA credits are eligible for the energy community bonus

The IRA created 11 transferable tax credits, four of which are eligible for the energy community bonus:

• §45 PTC: Electricity produced from certain renewable resources
• §45Y PTC: Clean electricity production credit
• §48 ITC: Energy credit
• §48E ITC: Clean electricity investment credit

§48 and §48E ITC eligibility determined on placed-in-service date

For projects that claim an investment tax credit under §48 or §48E, eligibility for the energy community bonus credit is determined on the date that the project is placed in service (PIS) and is not tested again.

Because eligibility is determined on a PIS date that is subject to potential delays, developers should think carefully about how to incorporate the statistical area category into their financial assumptions.

The statistical area category is determined annually, based on the prior year's unemploment rate. As the IRS FAQs state, "Because an MSA's or non-MSA's status as an energy community depends on its unemployment rate for the previous year, an MSA or non-MSA that qualifies as an energy community in one period might not qualify as an energy community in a later period if its unemployment rate for the previous year falls below the national average."

§45 and §45Y PTC eligibility determined annually with a beginning-of-construction safe harbor

For projects that claim a production tax credit under §45 or §45Y, eligibility for the energy community bonus credit must be determined every year during the ten-year PTC period. Theoretically, a wind project could qualify one year under the statistical area category but not qualify the following year because of a change in employment rates.

However, the IRS created a safe harbor for PTC projects with beginning-of-construction dates on or after January 1, 2023. If the project owner determines that the project is eligible for the energy community bonus credit on the date construction is considered to have started for tax purposes, then the project will qualify for the bonus credit for the entire ten-year PTC period and is not tested again.

"Legacy" §45 PTCs are not eligible for energy community bonus

Projects that generate §45 PTCs that were placed in service before December 31, 2022 are not eligible for the energy community bonus, even if the project happens to be located in an energy community and is within its ten-year period of credit generation.

The December 31, 2022 date is set in the IRA itself (H.R.5376).

50% of a project's nameplate capacity (or square footage) must be in an energy community

A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that a project is capable of producing on a steady-state basis during continuous operation under standard conditions.

For battery storage projects, at least half (50%) of the storage capacity, as measured in megawatt hours, should be in an energy community.

Lastly, for projects that do not generate nor store energy, like biogas, the 50% threshold is measured on a square footage basis.

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When performing due diligence on the energy community bonus, it's helpful to approach the process based on the credit type and energy community category.

Credit type

ITCs

‍Tax credit buyers should request documentation that demonstrates when and where the project was placed in service. Then, buyers and their advisors should crosswalk that location to an appropriate energy community siting resource, like one of the IRS's appendices. (We provide links to these appendices in the guidance section of this post.)

When validating a project's location, it's important to keep the "50%" rule in mind.

PTCs

Due diligencing the energy community bonus for PTCs is effectively the same as ITCs, although buyers will want to validate when and where the project began construction (versus when and where the project was placed in service). Once again, it's important to keep the "50%" rule in mind.

Energy community category

As far as each category is concerned, the statistical area and coal closure categories are relatively straightforward from a due diligence standpoint: the IRS has published lists of areas that qualify for each. The brownfield category, however, may present a slightly more nuanced due diligence process.

Statistical area

It's important to recall that the statistical area category changes every year, based on the prior year's unemployment rate. As we'll discuss below, the IRS is obligated to publish updates to this category every year, generally in May.

Coal closure

Unlike the statistical area category, the coal closure category cannot shrink – that is, once an area qualifies as a coal closure, it remains as such for the duration of the energy community bonus.

However, the coal closure category can expand, and we fully expect it to do so. According to a 2022 analysis by the Energy Information Agency (EIA), nearly a quarter of the operating U.S. coal-fired fleet is scheduled to retire by 2029. Every closure will add more census tracts to the list of areas eligible for the energy community bonus.

Brownfield

The IRS has not published – and, as far as we know, has no plans to publish – a consolidated list of areas that qualify as brownfields for purposes of the energy community bonus. In fact, the DOE energy community map doesn't even include federally-recognized brownfield sites. (The EPA, however, maintains a list of federally-recognized brownfields in its cleanups in my community map.)

We doubt the IRS or any federal agency will publish a definitive list of brownfields. There are simply too many moving parts across federal, state, local, and tribal brownfields programs.

So, an opinion from an environmental attorney may be warranted, and the scope of the opinion will vary based on which of the three brownfields safe harbors a project is claiming.

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Latest guidance expands the number of areas that are eligible for the energy community bonus

The most recent IRS guidance, Notice 2024-30, broadened eligibility for the energy community bonus through two key changes:

• Expansion of the "nameplate capacity attribution rule"
• Inclusion of two additional NAICS codes – which are in our list above – for determining the fossil fuel employment rate for a statistical area category

Expansion of the nameplate capacity attribution rule

The "nameplate capacity attribution rule" pertains to projects with offshore generation – namely, offshore wind – that have a nameplate capacity but are not located within a census tract, an MSA, or a non-MSA. The rule, essentially, allows developers to allocate their offshore nameplate capacity onshore for purposes of qualifying for the energy community bonus.

Prior to Notice 2024-30, the attribution rule generally allowed offshore wind projects to qualify for the energy community bonus if their power-conditioning equipment closest to the point of interconnection was in an energy community.

Notice 2024-30 expanded the nameplate capacity attribution rule to include not only power-conditioning equipment, but also supervisory control and data acquisition (SCADA) equipment.

SCADA equipment must be owned by the developer and located in an "energy community project port." To qualify as an energy community project port, a port must: 

• Be used "either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance" of the project
• Have a "significant long-term relationship" with the project, meaning the developer owns or leases all or part of the port for a minimum term of ten years
• Be the location at which staff employed by, or working as independent contractors for, the project are based and perform functions essential to the project's operations. Essential functions include "management of marine operations, inventory andhandling of spare parts and consumables, and berthing and dispatch of operationand maintenance vessels and associated crews and technicians"

Inclusion of two additional NAICS codes

Notice 2024-30 added two additional NAICS codes for determining the fossil fuel employment rate for a statistical area category:

• 2212: Natural gas distribution
• 23712: Oil and gas and pipeline and related structures construction

These NAICS codes cover workers in local gas distribution companies and construction workers on oil and gas pipelines.

According to Norton Rose Fulbright, "The biggest additions to the list of potentially eligible counties are in six Midwestern states: Minnesota (57), Missouri (57), Illinois (28), North Dakota (23), Wisconsin (23) and Indiana (20)."

The IRS has released five pieces of energy community guidance, with regulations to come soon

Energy community regulations should arrive by June 30, 2024

As Notice 2024-30 notes, proposed regulations are forthcoming. Until then, "taxpayers may rely on the rules described in sections 3 through 6 of Notice 2023-29, as previously clarified by Notice 2023-45 and modified by section 3 [of] this notice, for taxable years ending after April 4, 2023."

Based on the Q2 update to the IRS 2023-2024 Priority Guidance Plan, energy community regulations should arrive before the end of the current "plan year," which concludes on June 30, 2024.

Where to find the latest guidance

The IRS and Treasury maintain lists of IRA-related guidance, including guidance specific to the energy community adder. Although the lists generally overlap, there may be differences based on when each website was last updated.

• IRS list of IRA guidance
• Treasury list of IRA guidance

Below is a close look at all the guidance that's been released through March 2024.

Notice 2022-51: Request for Comments on Prevailing Wage, Apprenticeship, Domestic Content, and Energy Communities Requirements under the Inflation Reduction Act of 2022

• Date: October 5, 2022
• News release: IRS 
• Companion documents: N/A

Notice 2023-29: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022

• Date: April 4, 2023
• News release: IRS 
• Companion documents: Appendix A, Appendix B, Appendix C

‍Notice 2023-45: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022

• Date: June 15, 2023
• News release: IRS 
• Companion documents: N/A‍

Notice 2023-47: Energy Community Bonus Credit Amounts or Rates (Annual Statistical Area Category Update and Coal Closure Category Update)

• Date: June 15, 2023
• News release: IRS 
• Companion documents: Appendix 1, Appendix 2, Appendix 3

‍Notice 2024-30: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022

• Date: March 22, 2024
• News release: IRS 
• Companion documents: Appendix 1, Appendix 2

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Expect energy community eligibility updates every May, beginning in 2024

According to Notice 2023-29, "The Treasury Department and the IRS intend to update the listing of the Statistical Area Category based on Fossil Fuel Employment annually. These updates generally will be issued annually in May."

The first update should arrive in May 2024 – that is, next month.

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DOE, EPA, and IRS have provided energy community eligibility and project siting resources

U.S. federal agencies who are responsible for administering or managing parts of the energy community bonus credit have published several key resources that are valuable to buyers, sellers, and their advisors:

• Department of Energy (DOE): Energy community map
• IRS: Frequently asked questions
• DOE National Energy Technology Laboratory (NETL): Frequently asked questions
• Environmental Protection Agency (EPA): RE-powering America's land initiative
• EPA: Cleanups in my community
• Interagency working group: Energy community tax credit bonus

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To learn more, you can download our 100-page transferable tax credit handbook or start a conversation with our transactions team.

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First Solar's sale of $700M of §45X advanced manufacturing production credits (AMPCs) to Fiserv in the closing weeks of 2023 rightfully made headines. Although nine-figure tax credit transfers had closed earlier in the year, First Solar's deal seemed to be the harbinger of big things to come for the IRA's transferability mechanism.

It's easy to see why. Unlike established credits, like the §45 PTC and §48 ITC, the §45X AMPC was created by the Inflation Reduction Act. First Solar, in fact, sold their §45X credits within days of IRS guidance that effectively unlocked the credit. What's more, the deal was between two multi-billion-dollar public companies.

But the media attention, while welcomed across the clean energy industry, potentially overshadowed a broader trend: tax credit transfers had been closing at a steadily increasing rate throughout 2023. First Solar's deal came nearly 11 months after what we believe was the first publicly announced tax credit transfer.

The clean energy tax credit market has further accelerated into 2024. To bring the full story to life — to highlight the range of credits, technologies, and structures — Reunion is maintaining a list of publicly announced tax credit transactions. (And if we're missing a deal, we invite you to let us know at the bottom of this post.)

Check back from time to time. We'll keep the list going.

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Publicly announced IRA clean energy tax credit transfer deals

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Summary of data

• Quarter:  The quarter in which the deal closed. Occassionally, deals are announced in the quarter after which the deal 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.

Undisclosed data is flagged as "UD."

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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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