Reunion's Market Monitor Q2 2025 Report

The IRA has fueled clean energy deployment

The Inflation Reduction Act has had a significant impact on clean energy deployment in the U.S., leading to accelerated growth among solar, wind, battery storage, and other clean energy technologies:

• The two-year post-IRA period has seen $89 billion in investment in new, US-based clean energy manufacturing, versus $22B in the two years preceding the IRA (see Figure 1)
• Investment in clean energy production and industrial decarbonization is $161 billion since the passage of the IRA, a 43% increase from the comparable pre-IRA period

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Americans overwhelmingly support clean energy

Clean energy is now a major part of the US economy, employing over 3.5 million workers. Since 2020, the clean energy industry has added 400,000 new jobs, significantly outpacing the rest of the energy sector.

The federal solar investment tax credit was first passed under the George W. Bush administration via the Energy Policy Act of 2005, and for the last 20 years there has been a looming threat that this tax credit will be removed. But it has persisted, because it has been highly effective in driving solar adoption, and solar energy is extraordinarily popular among Americans.

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The IRA has growing, bipartisan support

Similarly, the Inflation Reduction Act has bipartisan support:

• In August 2024, a group of 18 Republican Congress members wrote to a letter to Speaker Mike Johnson saying: “Prematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground, would undermine private investments and stop development that is already ongoing.” Speaker Johnson responded that when making changes to the IRA, “you’ve got to use a scalpel and not a sledgehammer.”
• The total clean investment of $493 billion in the two-year post-IRA period has flowed into all 50 states, but over half of that has gone to Republican states

We have reason for optimism that the major provisions in the Inflation Reduction Act will persist. It’s unlikely that a majority of Congress will support a significant repeal of a law that is driving new jobs and significant investments in clean energy. Repealing the IRA after it has been in force for over two years will also upend many private businesses, which have made billions in investments under the anticipation that the law will be in force for a decade, if not substantially longer.

Furthermore, the final house race was called December 2nd, landing at 220 Republican seats and 215 Democrat seats. Given that 218 votes are required to form a majority and pass legislation, Republicans have a very thin margin for defections - only two.

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Buyers and sellers remain active in the market for 2025 tax credit and beyond

In the tax credit transfer space, we continue to see a heavy dose of activity that is, in fact, ramping up, particularly from buyers wanting to lock in 2024 and 2025 tax credits before any potential changes.

The team at Reunion remains highly optimistic about a clean energy future and stand ready to support all existing and new customers.

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How President-elect Trump’s incoming administration might affect tax guidance and what grenades, if any, a Republican-held Congress might lob at the Inflation Reduction Act energy credits are looming questions for tax practitioners. What the administration and Congress could do and what they’re likely to do are two different things. We have no crystal ball, but we do have four years of observations from the prior Trump administration. One thing is fairly certain: There will be plenty of work for Tax Notes readers in the next four years, and especially for the rest of this year for those facilitating energy credit transactions. Most of the IRA probably isn’t going anywhere, despite its costs and the impending expiration of many provisions of the Tax Cuts and Jobs Act, which Republicans in Congress and Trump would like to renew.

Battery Low?

The BBC’s Top Gear was channeling The Onion, but its satire writers identified a likely target for possible elimination in the IRA credits when they wrote: “All Electric Cars in the US to Be Retrofitted With V8s.” The “unused batteries will be repurposed into massive monster truck ramps,” explained the subheading. Section 30D might see some legislative changes, but whether the battery life of the electric vehicle credits has really reached its end is debatable. Some trimming around the credit’s edges might be the likeliest outcome for now.

The history of the EV credits is potentially instructive. Individual consumer credits have largely had bipartisan support, although over time the consensus has started to crack along party lines. The alternative fuel vehicle credit of the early 2000s gave taxpayers a deduction of up to $2,000 for an alternative fuel vehicle or a hybrid. The Energy Policy Act of 2005 replaced the deduction with a credit of up to $4,000. It passed the Senate 74 to 26 and the House 275 to 156, with then-Sen. Joe Biden voting no and Sen. John Thune, R-S.D., voting yes. Section 30D was added by the Energy Improvement and Extension Act of 2008 with nearly all senators voting in favor, including Thune, and the House mostly split along party lines. The credit was raised to $7,500, with a phaseout after a manufacturer sold 250,000 vehicles. The phaseout was intended to be the point at which alternatives to the combustion engine had reached commercial viability. But the credit didn’t end; instead, Congress expanded it.

Individual consumer credits have largely had bipartisan support, although over time the consensus has started to crack along party lines.

The IRA, which passed on a hard party-line vote, overhauled section 30D to add income thresholds for car buyers, manufacturers’ suggested retail price caps, and production requirements in North America. Half of the credit is now dependent on meeting the critical minerals requirement, and the other half, the battery components requirement. The IRA’s updates also switched out the term “new qualified plug-in electric drive motor vehicle” for “new clean vehicle” and increased the minimum battery capacity requirement from four to seven kilowatt-hours. The vehicles-sold limitation was removed.

The presidential transition team is reportedly looking at ways to eliminate section 30D. Nothing has been said about the other EV-related credits, such as the alternative fuel refueling property credit, the credit for previously owned clean vehicles, and the credit for commercially owned clean vehicles. The Joint Committee on Taxation’s updated 10-year cost estimates in April 2024 for the clean vehicle credits included only the refueling property credit, at $1.3 billion, a drop from the $1.7 billion estimated in 2022 (JCX-7-23). The 2022 estimate for all of the clean vehicle changes in the IRA was $14.2 billion (JCX-18-22).

Legislators have already proposed changes to section 30D. In the End Chinese Dominance of Electric Vehicles in America Act of 2024 (H.R. 7980), House Ways and Means Committee member Carol D. Miller, R-W.Va., proposed changing the excluded entities in section 30D(d)(7) to strengthen the foreign entity of concern rules. (Prior analysis: Tax Notes Federal, Apr. 29, 2024, p. 778.) The JCT estimated that the effects of the bill would be $660 million between 2024 and 2034.

And now for the obligatory Elon Musk mention: The Tesla CEO and prospective Department of Government Efficiency co-leader has suggested that eliminating the EV credits would help his company, but he has a history of opposition to the IRA’s version of section 30D. In December 2021, when asked about the plan to subsidize EVs and charging station production through credits, Musk responded: “I’m literally saying get rid of all subsidies.”

Planning for Transition

Practitioners working with energy tax credits have become comfortable with uncertainty, said Jenny Speck of Vinson & Elkins LLP. That’s by necessity. “Many of the credits that were enhanced in the IRA have been around for decades,” she noted, but many survived over the years through a series of last-minute or even post-expiration retroactive extensions by Congress. The prior Trump administration did not remove them. In fact, the Bipartisan Budget Act of 2018 enhanced the credit amount for carbon sequestration in section 45Q by expanding the scope of eligible taxpayers and increasing the credit amount. For various reasons, it seems likely that Congress will look for less dramatic changes to the energy tax credits than full repeal. The transition raises the potential that lawmakers might scale back eligibility for some credits or the amount of credits, Speck said. But there is also the possibility that the new Congress will instead use the opportunity to ensure that the investments are directed where legislators intend, she said.

Practitioners working with energy tax credits have by necessity become used to uncertainty.

Speck said she hasn’t seen a slowdown in stakeholder interest in selling or purchasing credits. The market has been on a solid, upward trajectory as sellers and buyers become acclimated to the transferability regime, and that seems likely to continue.

There are some steps that taxpayers should consider in light of the calendar and the administration transition. Speck noted that some credits sunset this year and the required domestic content percentage increases for bonus credits in the new year. Accordingly, developers might want to start construction by the end of the year, she said. Credit buyers should ensure that they have clear change-in-law provisions in their contracts, particularly if credits will be procured in the future, said Andy Moon of Reunion, an energy tax credit marketplace.

Advanced Manufacturing Changes?

Treasury and the IRS released the final regulations (T.D. 10010) for the section 45X advanced manufacturing production tax credit in October, but there could be some changes in store from the new Congress. (Prior analysis: Tax Notes Federal, Nov. 11, 2024, p. 1108.) The likeliest is the addition of a rule blocking credits for companies owned by entities in specific foreign countries. That might not have a large revenue effect, but it would suit political objectives. Many Energy Department loan programs already have restricted ownership requirements, so this type of change has a blueprint.

Folks, This Ain’t Normal

Does it portend anything for tax that Joel Salatin is rumored to be slated for a position at the Department of Agriculture? For readers who have never contemplated owning backyard chickens, Salatin is a farmer in Virginia who writes books (including the one referenced in the heading above) that remind his readers that it’s best to work with nature rather than against it. Salatin’s livestock fertilizes his pastures, and he has given tours of his farm to showcase his environmental and agricultural practices. One can make a reasonably good guess about his opinion of biogas derived from larger dairy operations.

Even if some incoming appointees might disfavor certain forms of biogas, targeting those forms would require Congress to act, because the IRA put them into section 48. There were bipartisan efforts to include qualified biogas property in 2021 when Thune joined then-Sen. Sherrod Brown, an Ohio Democrat, to propose the Agriculture Environmental Stewardship Act of 2021. The House companion bill was sponsored by then-Ways and Means members Ron Kind, a Wisconsin Democrat, and Tom Reed, a New York Republican. Ways and Means Committee member Mike Thompson, D-Cal., also included biogas in the Growing Renewable Energy and Efficiency Now (GREEN) Act of 2021, but that had no Republican cosponsors.

Paring back the credits for biogas might be unpopular even among Republicans, because of where most of the methane for biogas comes from — dairy operations and waste facilities in rural areas — and the oil and gas industry’s involvement in renewable natural gas.

Tariffs

Trump likes tariffs as domestic protection measures. In his discursive interview with podcast host Joe Rogan, he cited as an example of his approach a planned automobile factory in Mexico owned by a Chinese company that would sell cars into the United States. “I said if I’m there when I’m president, I will put 100 or 200 percent tariffs on every car; they’ll be unsalable in the United States. They just announced they’re not going to build the plant,” he said. “To me, the most beautiful word — and I’ve said this the last couple of weeks — in the dictionary today is the word ‘tariff.’” Rogan challenged him on whether he’d actually try to eliminate income taxes and replace them with tariffs. Trump shrugged. “Yeah, sure, why not,” he replied, and then cited the tariffs supported by President William McKinley. “Try” is the operative word in that response. Trump knows it’s far from likely, which is why the transition team and Republicans in Congress are spending time on the TCJA renewal instead. There will almost certainly be tariff increases, because Congress ceded its power to set tariff rates to the president long ago. (Prior analysis: Tax Notes Federal, Oct. 21, 2024, p. 409.)

In 2018 the Trump administration imposed a 30 percent tariff that declined by 5 percent annually over four years on solar cells and modules after the U.S. International Trade Commission found that increased foreign imports of solar panels were causing “serious injury” to domestic manufacturers. Cells that were less than 2.5 gigawatts were exempt.

The consternation about tariffs in the energy sector might be exaggerated.

The consternation about tariffs in the energy sector might be exaggerated. The Biden administration on May 14 announced an increase in tariffs on Chinese EVs from 25 percent to 100 percent. The tariffs on lithium-ion EV batteries and battery parts were slated to increase from 7.5 percent to 25 percent in 2024. On May 16 the administration announced that it had doubled the tariff rate on Chinese solar cells and models, from 25 percent to 50 percent. Still, the Rhodium Group and MIT’s Center for Energy and Environmental Policy Research concluded in a report that “if all announced and under-construction battery manufacturing facilities come online as scheduled and produce at expected volumes, the U.S. will produce more battery cells and modules than what domestic demand will consume by 2030.” Domestic EV manufacturing is expected to exceed domestic demand by 2027, if all the facilities that are operating, under construction, and announced are completed, but it could fall short of projected demand by 2030, according to the report.

Looking Ahead

The inherent uncertainty in the transition could unsettle the market for buying and selling tax credits. But history suggests that the energy credits are quite durable. Wind and solar credits have survived almost 20 years of extender legislation packages. Moon said that tax equity participants have long questioned whether it was worth the effort to plan tax equity transactions because the ability to do them could be revoked, but they persist. And ultimately, clean energy enjoys high levels of popularity, he said.

The potential uncertainty is unlikely to dampen demand for credits in the near term. Moon said that Reunion expects to remain busy facilitating transfers into 2025. “There is a lot of activity, particularly from buyers looking to lock in 2024 and 2025 tax credits before any potential changes,” he said. He added that it is important for the new administration to provide policy clarity as quickly as possible. “Having certainty one way or the other is most helpful,” Moon said. Any statutory changes Congress pursues will take time to undergo the legislative process, and will almost certainly not be retroactive.

On October 24, 2024, the Department of Treasury and the Internal Revenue Service (IRS) issued final regulations for the Advanced Manufacturing Production Credit (§45X). The final regulations were published in the Federal Register on October 28, 2024 and are largely consistent with the proposed regulations issued on December 15, 2023.

Noted below are key changes as well as clarifying guidance that were issued in the final regulations. Jump to a section:

• Key changes
• Clarifying guidance
• Key dates
• Appendices

For a primer on 45X credits and due diligence, please refer to our insights here.

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Distinguishing "minor assembly"

The final regulations replace each instance of "mere assembly" with "minor assembly" to clarify what activities meet the substantial transformation threshold required to qualify for §45X tax credits.

The guidance recognizes that certain eligible components such as a solar module or a battery module are produced primarily by assembling other components. In these cases, the assembly required to achieve production of the ultimate eligible component (solar module or battery module) should not generally be viewed as disqualifying “minor assembly.”

Furthermore, eligible components that have completed substantial transformation, are considered “produced by the taxpayer,” and have been produced and sold to a third-party, in which only “minor assembly” remains, does not disqualify the original party from claiming the §45X credit. As a result, the ensuing third-party who performs the “minor assembly” would not be eligible to claim the credit.

Production costs expanded for critical minerals and electrode active materials

The final guidance is intended to recognize the value of material costs while addressing concerns regarding multiple-crediting and unintended incentives. The proposed regulations did not specifically allow direct material costs, indirect material costs, or any costs related to the extraction or acquisition of raw materials to be considered as production costs. However, the Treasury Department and the IRS, after consultation with the Department of Energy, have reconsidered the proposed exclusion of all material costs based on comments received and revised the regulations to include extraction costs for raw materials sourced in the U.S. or its territories if incurred by the taxpayer claiming the credit.

Additionally, if a taxpayer acquires extracted raw material as a direct (or indirect) material cost, the material costs may be included as production costs consistent with the rules provided under section 263A regardless of whether the extracted material is domestic or foreign-sourced.

Furthermore, any inclusion of direct and indirect material costs may be included if certain conditions are met, but only if they are not for materials that are already an eligible component at the time of purchase (e.g., applicable critical mineral or electrode active material), and as such, an additional credit cannot be claimed on costs relating to the acquisition and use of other eligible components.

See also "Additional substantiation requirements for critical minerals and electrode active materials."

Additional substantiation requirements for critical minerals and electrode active materials

In order to include direct or indirect materials costs as production costs when calculating a §45X credit for the production and sale of critical minerals or electrode active materials, a taxpayer must include certifications from each supplier, as an attachment to the tax return, and maintain specific books, records, and documentation to substantiate the credit.

The certifications must include the supplier’s employer identification number, be signed under penalties of perjury, and state that the supplier is not claiming a §45X credit for the materials purchased, nor is the supplier aware of any prior supplier claiming a §45X credit in the chain of production for the materials.

The books, records, and documentation requirements include, whether prepared by the taxpayer or (ideally) a third-party:

• An analysis of any constituent elements, materials, or subcomponents that concludes the material did not meet the definition of an eligible component (for example, an applicable critical mineral or electrode active material) at the time of acquisition by the taxpayer
• A list of all direct and indirect material costs and the amount of such costs that were included within the taxpayer’s total production cost for each applicable critical mineral
• A document related to the taxpayer’s production activities with respect to the direct and indirect material costs that establishes the materials were used in the production of the applicable critical mineral

Failure to provide this documentation with the return filing, or failure to provide an “available upon request” statement, would constitute a failure to substantiate the tax credit claim. To help ensure proper substantiation and compliance, consult the 45X Due Diligence Guide.

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Definition of produced by the taxpayer

‍The final regulations expanded the definition of “produced by the taxpayer” to confirm that taxpayers may produce eligible components using recycled materials (secondary production). The updated definition now reads, “Primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials.”

Clarification on §45X vs §48C facility

‍The final regulations simplified the definition of a §45X facility, replacing the term “production unit” with “independently functioning tangible property” that is used and necessary for the eligible component to be considered produced by the taxpayer, regardless of physical location. Accordingly, tangible property used to produce a subcomponent which is later integrated, incorporated, or assembled into a distinct and final eligible component may not be part of the section 45X facility.

This clarification allows the use of subcomponents manufactured at a separate §48C facility without tainting the ability to qualify for a §45X credit, as long as the subcomponent is not part of the determination that the taxpayer is the producer of the eligible component.

The final regulations also added a specific rule to address §48C taints in a contract manufacturing arrangement - the tangible property determination for a 45X facility would apply to either party in the transaction, regardless of which party to the contract manufacturing arrangement is claiming the credit.

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Effective date

‍December 27, 2024

Applicability dates

‍As noted in § 1.45X–1(j), §1.45X–2(f), §1.45X–3(g), and §1.45X–4(d), these final regulations apply to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending on or after October 28, 2024.

Taxpayers may choose to apply these regulations to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending before October 28, 2024, provided that taxpayers follow these regulations in their entirety and in a consistent manner.

Additionally, §5.05(2) of Notice 2023–18 and §3 of Notice 2023–44, which relate to the interaction between §45X and §48C, are superseded for eligible components for which production is completed and sales occur after October 28, 2024.

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Appendix 1 — Additional technology-specific changes

Clarification on tandem cells

‍The final regulations addressed commenters concerns regarding disparate treatment between different types of tandem cells and the resulting capacity and credit amount. The Treasury Department and IRS agreed with commentators, and to prevent potentially incentivizing the development of certain tandem technology, added additional text for cells that are either mechanically stacked or using interconnected layers: “Where that cell is sold to a customer who will use it as the bottom cell in a tandem module, its capacity should be measured with the customer’s intended top cell placed between the bottom cell and the one-sun light source.”

Definition of "polymeric backsheet"

‍The final regulations clarify that the definition is limited to a sheet on the back of solar modules composed, at least in part, of a polymer, that acts as an electric insulator and protects the inner components of such module from the surrounding environment. This added definition for "polymeric" excludes most glass backsheets because they are typically not composed of a polymer, but of soda-lime glass.

Solar grade polysilicon measurement standards

‍The final rules added that satisfaction of the minimum purity requirement will be determined in accordance with the standards provided in SEMI Specification PV17-1012 Category 1. This standard also provides additional clarification by including guidance to distinguish between material and immaterial impurities.

Determining credits from related offshore wind vessels

‍§1.45X-3(c)(4)(ii) was revised to include the application of Federal income tax principles to determine inclusions and exclusions for the sales price used to calculate the §45X credit for offshore wind vessels.

Additional standards allowed to certify rated capacity of completed wind turbines

‍The final regulations revise proposed §1.45X-3(c)(6) to add both AWEA 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine certification standards.

Clarification to DC optimized microinverter systems

‍§1.45X-3(d)(5)(iv)(B) requires that the inverter and DC optimizer in the DC optimized inverter system to be produced and sold as a combined end product. The Treasury Department and the IRS retained this rule while also clarifying that the inverter and the DC optimizer do not need to be physically packaged together at sale, and the inverter and DC optimizer do not need to be fully interconnected and assembled at the time of sale.

No separate credit is created solely for a DC optimizer, and no changes were made to the number of inverter units used to compute the available credit amount, as these changes are beyond the authority of the Treasury Department and IRS.

Battery cell energy density requirements refer to volumetric energy density

‍When determining if a battery cell has an energy density of not less than 100 watt-hours per liter, the final regulations clarify that energy density is referring to volumetric energy density in §1.45X-3(e)(3)(i)(B) (e.g., as opposed to gravimetric, mass-based, energy density).

Clarification on modules using battery cells

Many commenters expressed concerns regarding the proposed regulations which would not have permitted a credit for the production of a module that is not the end-use configuration. Other commenters acknowledged that the proposed regulations could create confusion as the definition of battery module could potentially include items that are referred to in the industry as “battery packs.”

To address this confusion, §1.45X-3(e)(4)(i)(A) of the final regulations:

• Redefine an end-use configuration as “the product that ultimately serves a specified end use combines cells into a module such that any subsequent manufacturing is done to the module rather than to the cells individually”
• Clarify that “where multiple points in a supply chain may be eligible under this section, the first module produced and sold that meets the requirements of this section and the kilowatt-hour requirement in paragraph (e)(4)(i) of this section will be the only module eligible”

Clarification on modules not using battery cells for thermal and thermochemical battery technology

‍Taxpayers producing thermal and thermochemical battery modules with no battery cells must convert the energy storage to a kilowatt-hour basis, provide both the methodology and testing regarding this conversion, and maintain this testing as part of its books and records.

Additionally, the kilowatt-hour conversion cannot exceed the direct conversion of the total nameplate capacity of the thermal battery module to kilowatt-hours (the capacity that is sold to the consumer), and the taxpayer claiming the §45X credit must use the same methodology consistently, subject to any updated standard of the same methodology and testing, for all battery modules (with or without cells) sold in the taxpayer’s trade or business. The final regulations incorporate these clarifications in §1.45X-3(e)(4)(ii).

Additional guidance forthcoming for aluminum

‍As noted in the Summary of Comments and Explanation of Revisions, a number of comments were received regarding additional clarification for the definition of aluminum, and the Treasury Department and the IRS have determined that additional consideration is necessary prior to finalizing proposed §1.45X-(b)(1) with respect to this definition.

Appendix 2 — Additional contract manufacturing and relation person election changes

Additional critical minerals use case for contract manufacturing

‍The final regulations also added an additional contract manufacturing example to demonstrate a way to structure and claim a tax credit on initial extracting and refining activities that do not meet the minimum purity levels required for an eligible component until the initial materials are later purchased, completed, and sold.

Anti-abuse rule measured at point of sale for Related Person Election

‍The final regulations added a clarification regarding defects with regard to a related person election. If an eligible component is not defective at the time of sale, defects arising after the point of sale may occur in the ordinary course of a business and do not generally raise the improper claim concerns regarding defective components.

Appendix 3 — Select items upheld in final regulations

Confirmation of the scope for domestic production and use

‍The final regulations adopted the proposed rules that require eligible components to be produced within the United States, whereas constituent elements, materials, and subcomponents used in the production of the eligible components are not subject to a domestic production requirement.

In addition, the eligible components do not ultimately have to be used in the United States for §45X eligibility.

Production efforts required to stack or claim additional credits for integral components that are also eligible components

‍The final regulations upheld the temporary regulations perspective that a taxpayer must produce (rather than merely purchase or acquire) an eligible component that it then integrates, incorporates, or assembles into another eligible component that is then sold to an unrelated person in order to claim credits on both components.

No additional credits for defective units that are subsequently replaced

‍A commenter proposed that eligible components that were used to replace defective units pursuant to a contractual obligation do not appear to violate proposed anti-abuse provisions. However, the final regulations confirmed the replacement of a defective unit does not represent a new sale to an unrelated person, and §45X does not incentivize the production of two eligible components related to a single sales transaction.

Rejection to expand eligible components and applicable critical minerals

‍Commenters requested to expand the list of eligible components and applicable critical minerals, but the Treasury Department and the IRS declined, citing the lack of statutory authority to expand the list.

Rejection of proposed safe harbor for contract manufacturing arrangements

‍The Treasury Department and the IRS declined a commenter’s request to establish a safe harbor for contract manufacturing agreements in place before the applicability date of the proposed regulations.

However, a taxpayer may still elect to apply the special rule (§1.45X-1(c)(3)(iii)), which allows the parties of a contract manufacturing arrangement to agree on which party to the contract will claim the credit.

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Drawing on over $10B of verified transactions, our report takes a deep dive on the Section 48 investment tax credit, Section 45 production tax credit, and Section 45X advanced manufacturing production credit. We also examine emerging market trends and deal dynamics.

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Participants in the initial wave of tax credit transfer transactions filed their returns reflecting those deals on October 15, marking another milestone for the Inflation Reduction Act’s experiment in tax credit transfers. At least for some credit buyers, the tax system is inching closer to the inevitable: audits.

At least for some credit buyers, the tax system is inching closer to the inevitable: audits.

In the due diligence they performed before the transfers, participants began preparing for examinations. The diligence process for tax credit transfers will likely always be at least partly customized to the parties because different entities have different concerns, but a more standardized roadmap has emerged over the past year or so as advisers and tax credit buyers and sellers gained experience.

Doing Your Homework

The basic outlines of the diligence process were informed in part by the precursor to transfers — tax equity. But the IRA clearly conceived of a transfer as a far simpler transaction, and accordingly they require less diligence. Consensus among buyers and sellers about how much less has evolved over time. The natural processes of maturation and acceptance of common diligence practices have made negotiations over due diligence more streamlined, said David Burton of Norton Rose Fulbright US LLP. “Now there are typically only a handful of issues to negotiate,” he said, adding that some buyers still do more due diligence than they need to out of an abundance of caution.

The due diligence required for a transfer is focused on ensuring that the project can continue to operate economically in order to avoid a recapture event or a disallowance of credits, said Billy Lee of Reunion, an energy tax credit marketplace. Unlike in tax equity and secured financing deals, investor returns aren’t dependent on cash flows of the project in transfers, hence less diligence. The relative simplicity of transfers is a large part of their appeal. “Transferees want to buy credits and never think about them again — that’s an ideal outcome of a tax credit purchase,” Lee noted. However, there are several areas where the tax credit buyer is exposed to some operational risk: avoiding recapture and complying with the prevailing wage and apprenticeship requirements.

Some deals require the seller to provide an annual compliance certificate to the buyer, but avoiding recapture and complying with the labor requirements are largely the project developer’s purview. Recapture, a scary possibility for transferees because it has high consequence, is very unlikely to happen, Lee said. If it does, the developer must notify the buyer so they can reflect that on their tax return and seek indemnification or make an insurance claim. Typical transfer agreements require transferors to comply with the prevailing wage and apprenticeship rules for alterations and repairs.

Prospective credit buyers and sellers increasingly try to ensure that the information they need for due diligence is prepared and vetted as they go into negotiations, said Anand Chaturvedi of Dili. Chaturvedi’s company automates the data and file processing that has traditionally been done manually in the due diligence stage of transactions and provides diligence reports that are based on complete data, rather than sampling, to identify risks. Chaturvedi added that collecting and processing diligence information before negotiations not only makes them go more smoothly but also helps to ensure that the data is available for a later examination by the IRS. “Part of our involvement in these deals is to make all of the documentation as robust as possible for audit,” he said.

Market Maturation

Due diligence may never be fully uniform for all transactions, but as the number of completed deals climbs, the process has become more efficient. “There is now a better appreciation for the scope of diligence on both sides. Buyers understand that they don’t need everything, and sellers understand that they can’t get away with providing nothing, or even the bare minimum,” Lee said. As a result, there are fewer disagreements in investment tax credit transfer negotiations over the scope of due diligence because it’s generally accepted what buyers and sellers need to be confident about the transaction, he said. Debate is more likely regarding due diligence for newer credits that have fewer precedent transactions, such as the section 45X advanced manufacturing production credit.

A handful of areas remain where buyers and sellers don’t always see eye to eye. Buyers sometimes ask for an independent engineer’s report. Sellers tend to argue that those reports are unnecessary for transfers, because the purchase takes place after the credits have accrued, Burton explained. Some buyers also seek corporate enforceability opinions. In addition, tax opinions are not part of every deal. Burton said that over half of his firm’s transfer deals through mid-October had no tax opinion condition precedent. The market appears to consider a good indemnity agreement a sufficient precaution.

The Required Minimum Is Not Enough

The final transfer regulations (T.D. 9993) outline the required minimum documentation that an eligible taxpayer must provide to a transferee, and some sellers initially sought to provide transferees with only that minimum. Advisers quickly pointed out that “minimum” was not equivalent to “recommended.” The preamble to the final rules notes:

In providing for the required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer, the intention was to require a baseline of information that is necessary for validating an eligible taxpayer’s claim of eligibility to an eligible credit, while not overburdening the eligible taxpayer with production requirements or altering the arm’s length arrangement between the parties.

But the preamble also explains that an objective of the rules was to allow “sufficient flexibility for market participants to determine if more information is necessary in a particular transaction,” and it suggests that agreements between taxpayers might go beyond the minimum requirements.

The final transfer regs also include in reg. section 1.6418-5(a)(4) a list of circumstances that may indicate reasonable cause for avoiding an excessive credit transfer tax. Those include review of the seller’s records regarding the determination of the eligible credit, reasonable reliance on third-party expert reports, reasonable reliance on representations from the seller, and review of audited financial statements. The list also helped to frame the standard scope of diligence.

Advisers quickly pointed out that ‘minimum’ was not equivalent to ‘recommended.’

Standard diligence for ITC transfers includes the cost segregation report, placed in service substantiation, appropriate insurance coverage, seller credit analysis, prevailing wage compliance, and basic parameters indicating that the project has the right and ability to operate. The validity of any bonus credits must also be covered. If there is a step-up transaction, an appraisal is needed, Lee said. “Our due diligence effort is comprehensive, but efficient — we try to hit all the points that are salient to make sure that credit buyers have everything they need to get comfortable and defend their position if there is a challenge down the line,” he said.

Looking Ahead to Audits

Planning ahead for an audit means anticipating the questions that the IRS will ask on information document requests and collecting that information in advance.

“Typically the purchasers want to do enough diligence that they feel comfortable that even if there is an audit, there’s a complete and substantive file they can point to,” Lee said. Buyers typically also agree with the seller stating that the seller can be involved and allowed to participate in an audit, Lee said. Similarly, if there’s indemnity, the seller is given the right to consent to any settlements, and where insurance policies exist the buyer also provides the insurer with audit participation and settlement consent rights. “An audit is going to be a collaborative exercise,” particularly because there is not typically a way to allow the buyer to transfer an audit to the seller,” Lee said.

One way to reduce the risks that worry buyers and insurers is for sellers to show that they have a strong program for ongoing compliance or reporting, Chaturvedi said. “For alterations and repairs, the project developer needs to continue to pay prevailing wages and also give confidence to their insurer or credit buyer that those compliance rules are being met,” he said.

Recording

Key topics

• 1:22 – "What's New" with Keith Martin of Norton Rose Fulbright
• 20:31 – Tax credit pricing
• 24:50 – Tax credit market size
• 25:30 – Emerging deal terms and dynamics
• 29:52 – Market participants
• 31:52 – Tax credit insurance
• 34:37 – Audience Q&A

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Special guest, Keith Martin of Norton Rose Fulbright

Keith Martin is a tax lawyer in the Washington office of Norton Rose Fulbright who has helped lead the project finance group at the firm for more than 25 years. The group did $211 billion in project financings and closed 448 significant transactions in the last four years. It closed 57 large tax credit sales in the last year involving more than $6 billion in tax credits. Keith worked for 258 companies last year on numerous transactions. He also lobbies the US Treasury and Congress on policy issues. The Chambers directory gives him its sole "star" ranking among US renewable energy lawyers.

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About Reunion

Reunion facilitates the purchase and sale of clean energy tax credits. So far in 2024, Reunion has worked with major corporations to acquire over $2.5 billion in tax credits from solar, wind, storage, advanced manufacturing, and other clean energy projects.

Our curated marketplace features billions of dollars of high quality tax credit opportunities, and our team of clean energy finance veterans supports buyers and sellers through each step of the transaction process, with a focus on commercial negotiation, due diligence, and risk mitigation.

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