September 27, 2023
10 min read

Analyzing the Returns of Tax Credit Transfer Transactions

When evaluating the economic benefits of a transferable tax credit purchase, buyers should consider how transaction timing can positively impact IRR and ROI.


Over the past year, we have talked to scores of potential buyers about the benefits and risks of acquiring transferable tax credits. Many measure their economic benefit in terms of the discount of the credit – i.e., how much they are willing to pay for a $1 reduction in their federal tax liability.

While important, the discount represents a single dimension to evaluate economic return. Payment terms for credits, as well as the potential impact on estimated taxes, are also key considerations.

In this article, we explore several hypothetical scenarios to understand how transaction timing impacts other key metrics, including internal rate of return (IRR) and return on investment (ROI).

Transaction scenarios under different payment terms

Let’s consider a transaction in which a corporate taxpayer, ABC Corp., is acquiring $100 of tax credits for a notional price of $90, reflecting a 10% discount. ABC is a C-Corporation, with estimated tax payments due on the fifteenth of April, June, September, and December. Its tax filing deadline is April 15 of the following year, but ABC makes an election to extend the date of its filing (and, for this example, we assume it files on September 15).

For purposes of this simplified analysis, we will assume that ABC does not calculate estimated taxes on an installment method but instead calculates estimated taxes based on equal quarterly payments.

Scenario 1: Sign and close at end of year, no estimated payment reduction

ABC identifies a tax credit opportunity in Q4 of their fiscal year and enters into a tax credit transfer agreement (TCTA) on December 31, 2024. ABC closes on the credit purchase simultaneous with the execution of the agreement and pays $90 on the same date.

Given the date of the purchase, ABC is unable to benefit from the reduction of estimated taxes throughout the year. Assuming it files its final tax return in September 2025, ABC receives a $100 benefit at that time through a reduction of its annual federal tax liability.1 The internal rate of return on this purchase would be 16%, and the ROI 11%.

Scenario 1: IRR of 16%, ROI of 11%
Scenario 2: Sign and close at beginning of year, four quarters estimated payment reduction

ABC identifies a tax credit opportunity early in the year and enters into a TCTA on January 31, 2024. As in scenario 1, it closes and pays for the credits simultaneous with the execution of the TCTA. (This would typically occur if a credit were generated early in the tax year; for instance, if a solar project was placed in service in January 2024.)

Scenario 2: IRR of 23%, ROI of 11%

ABC is able to reduce its four quarterly estimated payments by $25, reflecting an overall anticipated reduction of its federal tax liability of $100. The IRR impact of this transaction is 23%, while the ROI remains 11%.

Scenario 3: Sign and close mid-year, three quarters estimated payment reduction

Let’s assume that ABC identifies a tax credit opportunity and executes a TCTA on June 15, 2024. As in the previous scenarios, it closes and makes payment on the same date. In this scenario, ABC would have a cash outflow of $90 but realize an economic benefit of $50, as it would reduce its Q2 estimated tax payment by half of the tax credit purchased (reflecting the $25 of savings for each of Q1 and Q2). The net effect of its purchase on June 15 would be a $40 outflow.

In the next two quarterly payment dates, ABC would reduce its estimated tax payments by $25 each, producing an IRR of 82% and an ROI of 11%. (We realize that as the duration of an investment shortens, IRR becomes less meaningful as a metric.)

Scenario 3: IRR of 82%, ROI of 11% (As duration shortens, IRR becomes less meaningful.)
Scenario 4: Sign early year, close end of year, four quarters estimated payment reduction

In the transferability guidance released in June 2023, the IRS stated that a “transferee taxpayer [i.e., a tax credit purchaser] may also take into account a specified credit portion that it has purchased, or intends to purchase, when calculating its estimated tax payments…” (emphasis added). This is a favorable provision, as we’ll demonstrate in scenarios 4a and 4b.

Let’s assume that ABC identifies a tax credit opportunity early in 2024. It is a solar project that is expected to be placed in service in December 2024. ABC enters into a TCTA with the project owner in January 2024, but closing of the purchase and sale is conditional on the completion of the project. Therefore, the TCTA represents a binding, forward commitment to purchase credits from the project, but no payment is made until later in the year.

Given that the IRS guidance allows for ABC to reduce its estimated tax payments for credits it intends to purchase, and an executed TCTA is clear evidence for such intention, ABC would be able to reduce its four quarterly estimated tax payments by $25 and pay for the tax credits in December 2024 when the project is completed.

Once again, the ROI of the transaction remains at 11% (see Scenario 4a).2

Scenario 4a: ROI of 11%

In addition to reducing the buyer’s federal tax liability, this transaction has the benefit of generating working capital. Assuming the quarterly tax savings earn a conservative annualized return of 5%, the ROI of the transaction increases to 13% (see Scenario 4b).2

Scenario 4b: ROI of 13%

Keep potential scheduling delays in mind for ITC transfers

Keep in mind, project delays are a key risk for a buyer to evaluate in ITC transfer transactions when a project is anticipated to be completed late in the year. For example, if ABC reduced its quarterly tax payments throughout 2024, but the project in question was delayed into 2025, ABC would either need to find replacement 2024 credits from a different project or be subject to underpayment penalties.

We touched on this risk in an earlier blog post.

IRR and ROI metrics represent post-tax returns for the buyer

In another favorable provision, the IRS affirmed that the buyer does not have gross income with respect to the discount of a purchased credit. Therefore, the IRR and ROI metrics discussed in this paper represent post-tax returns (the exception being the interest on working capital in Scenario 4b, which would be taxable).

To the extent that a corporate taxpayer is viewing tax credit purchases as an alternative to traditional treasury investments, it should keep in mind the post-tax nature of the return metrics.

Download our transferability economic model

To learn more, corporate taxpayers can download our transferability economic model and align it with their company's fact pattern.

Download Model

How Reunion can help

Reunion operates a managed tax credit marketplace and provides close transactional support with a keen eye to risk identification and management. With over 40 years of combined tax credit transaction experience, Reunion’s leadership team guides buyers, sellers, and their advisors through every phase of the transferability process.


1For this analysis, we will assume that ABC receives the benefit of the credit upon filing of its tax return. In reality, this may depend on other factors, including if and when ABC receives a cash refund for overpayments.

2IRR is not a meaningful metric in this scenario as inflows of cash precede any outflows.

Reunion accelerates investment into clean energy

Our platform facilitates the purchase and sale of transferable tax credits to support solar, wind, battery, biogas and other clean energy projects.
Get Started