The “Big, Beautiful Bill” and the implications for corporate taxpayers and the clean energy industry

The Inflation Reduction Act of 2022 (IRA) delivered a plethora of benefits to renewable energy project developers, including billions of dollars in tax credits and newly created flexibility to transfer tax credits or capture direct pay. 

But these benefits come with strings attached, and it’s important for any clean energy project developer to understand the rules before diving into new projects. These strings are divided into two groups – “carrots” and “sticks” that the federal government is using to guide developers to meet certain conditions. Starting with the “sticks,” here is a brief overview of the eligibility rules for renewable energy Production Tax Credits (PTC) and Investment Tax Credits (ITC):

How should developers think about these rules? 

The simplest way to approach the wage and apprenticeship rules is to treat them as necessary prerequisites to project development. Without following these rules, developers will only capture a 6% ITC or 0.52 cent/kWh and leave significant value on the table. 

Developers who fail to meet wage and apprenticeship standards may “cure” their shortcomings by repaying shortfalls plus interest, or certain fees/penalties. If the developer was determined to have intentionally failed to meet these standards, the penalty amounts increase significantly. 

Fortunately for developers, the Department of Labor already publishes wage determinations and rates, and will be adding to that list as this program takes effect. Likewise, there has been increasing interest in apprenticeship programs across the country. New programs like the Real World Academy in New Jersey and the Sustainability Hub in Illinois are springing up and the Solar Energy Industries Association (SEIA) has a number of resources to support developers.

How do these prerequisites differ from adders?

So-called “adders” are the second important part of the tax credit regime created by the IRA. Serving as the “carrot” for developers, adders are true incentives for development under certain conditions. Here is a brief overview of the adders specific to the Production Tax Credit (PTC) and Investment Tax Credit (ITC):

How should developers think about adders? 

Adders can be a valuable way to capture additional PTCs or ITCs for any given project. Importantly, however, developers should be thorough in their diligence of eligibility. Many tax equity investors won’t fund adders until full IRS guidance has been issued, and will expect to see diligence documents proving the project’s qualifications. 

Some groups are already publishing helpful maps to illustrate where certain adders may be available, such as energy communities and low-income communities. Here is one example from S&P Global.

But once IRS guidance is in-hand and developers can confidently assess their project locations and domestic content, the adders under the IRA can deliver even more tax equity or transfer tax credit capital to projects. 

Where do we go from here? 

The Department of Treasury and the IRS are continuing to release guidance related to the IRA. In tandem, the project developer industry is collaborating with each other and industry groups like SEIA to identify best practices and optimize for maximum development value. Over the course of 2023, expect to receive more clarity on the formal obligations under the IRA, and the informal best practices across the renewable energy industry.

Reunion Infrastructure is working with 50+ developers to source transfer tax credits for banks, insurance companies, and corporates with tax appetite in 2023 and 2024 or beyond. Whether you are a developer or taxpayer looking for credits, please reach out at info@reunioninfra.com.

The IRA greatly expanded energy-related federal income tax credits and added §6418 to the Internal Revenue Code, which allows “eligible taxpayers” to elect to transfer (i.e., sell) certain tax credits to unrelated taxpayers for cash.

Eligible taxpayers can elect to transfer all or a portion of an eligible credit, and the transferee taxpayer is treated as the taxpayer with respect to such credit (or such portion thereof). The transferee taxpayer is allowed to claim the transferred tax credits on their tax returns, while also assuming some risk in the event of a recapture event or a challenge by the IRS on the qualification of the transferred tax credit.

Tax credits can be transferred for tax years starting after December 31, 2022. The cash payments are excluded from the transferor’s gross income and are not deductible by the transferee.

Tax credits under the following U.S. tax code sections can be transferred: §45, §45Y, §48, §48E, §45Q, §45V, §45U, §45Z, §45X, §48C, and §30C. (To learn more about each credit, read our overview of the IRA's 11 transferable tax credits.)

How we got here

A small number of corporate taxpayers have traditionally helped project developers monetize investment tax credits (ITCs) and production tax credits (PTCs) through a process called "tax equity." This process is complex and requires a team of lawyers, accountants, and appraisers to help establish complicated partnership structures. As a result, the majority of capital that flowed into the $15B-$20B pre-IRA tax equity market was historically provided by a handful of large banks. Given the limitations on these banks’ tax appetite, something would need to change in order to attract capital for the IRA’s 10x or greater tax credit regime.

To address this challenge, Congress created a new monetization mechanism called transferability or transferable tax credits. Now, post-IRA, any company with federal income tax liability may use a standardized purchase and sale agreement to buy tax credits at a discounted rate, allowing them to earn a savings on their tax bill while also financing new sustainable infrastructure.

What corporate tax groups and sustainability teams need to know

‍By exchanging cash for transferable tax credits, a corporation could, for example, spend $45M for $50M of tax savings, realizing a $5M savings compared with paying their normal federal income tax liability.There are nine types of tax credits (across 11 sections of the tax code) now available for transferability. Companies can buy transferable credits from different technologies and project types. More established technologies are likely to be viewed as lower risk, whereas newer technologies may offer more attractive pricing.

Across these nine types of tax credits, several of them are categorized as “production tax credits” (PTCs) or “investment tax credits” (ITCs). This terminology refers to how the credit is generated–either as the item in question is produced (e.g. kilowatt hours of renewable energy) or as capital is invested in the associated project (e.g. a percentage of the cost of a solar farm). Tax groups will want to make strategic decisions about sourcing PTCs vs. ITCs or both, in order to secure streams of tax credits over time in the case of PTCs or one-off purchases in the case of ITCs. Intermediaries can help in structuring the procurement of these credits.

Timing and process

‍Some specifics of the transfer process are awaiting clarification from the Treasury department, but there are some things we already know from section 6418 of the U.S. tax code:

• Credits can be elected for transfer up to the time the seller files their tax return (Example: a credit generated in CY2023 can be transferred to a buyer until April 15, 2024 or October 15, 2024 for extended corporate filers)
• Credits can only be transferred in exchange for cash to an unrelated party
• Cash paid by the buyer is nondeductible
• Credits may only be transferred one time; resale of the credits is not allowed
• Buyers may carry back the credits up to three years, and carry forward the credits up to 22 years

The transactions themselves will be completed with a customized but relatively simple purchase and sale-style agreement. These should be constructed by experienced tax attorneys to ensure adequate protections for buyers and sellers, but are ultimately less complex than traditional tax equity partnership structures.

Risk management

‍Transferable tax credits carry lower risk, in certain cases, versus traditional tax equity partnerships. For ITCs, a tax credit buyer is not concerned with the ongoing performance of the project beyond low-probability recapture events. And even for PTCs, the primary performance risk is related to the produced credit volume and not financial performance. The projects and developers associated with these credits should be vetted and underwritten to ensure credits are delivered as expected. For buyers of transferable credits, this review process can add certainty to reduce disallowance or recapture risk. Typically, buyers can also secure indemnifications from sellers to protect themselves in the event of recapture events. Transferable credits can also be insured against recapture, providing a backstop to indemnification.

Conclusion

‍Transferability represents a new pathway to access well-understood tax benefits for corporate taxpayers. By participating in the transferable tax credit market, companies can “do well and do good” by supporting renewable energy infrastructure and reduce their tax liability. Partnering with seasoned clean energy finance experts can help reduce risk and ensure a smooth, replicable transition process. For more information or to explore live project opportunities, please reach out to kevin@reunioninfra.com.