Andy Moon
August 8, 2024
Unlocking the Economic Benefits of Tax Credits Before Cash Payment
Corporate taxpayers can buy tax credits in a way that preserves the timing of existing tax-related cashflows, or even improves corporate cash availability relative to the status quo.
For Buyers
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.
For a real-world illustration of how this structure delivers value, see our Section 45 PTC transfer case study, which details transaction mechanics, cash flow timing, and buyer benefits.
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.
Denis Cook
January 21, 2024
IRS Releases Guidance for Section 30C Tax Credit for Alternative Fuel Vehicle Refueling Property
Latest §30C ITC guidance makes tax credit widely available across the U.S. but fails to clarify eligible equipment
For Sellers
On January 19, the IRS released key guidance for the §30C alternative fuel vehicle refueling property credit. The guidance included two appendices that identify eligible census tracts depending on a project's placed-in-service date. Alongside the guidance, the IRS issued a press release and an FAQ.
Takeaways
- The Inflation Reduction Act extended and meaningfully modified the §30C ITC
- 99% of U.S. territory is included in eligible census tracts
- Eligible locations will vary depending on when a project is placed in service
- DOE published a mapping tool that shows eligible areas with placed-in-service filter
- Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor
- Further guidance is coming
TAKEAWAY 1
The Inflation Reduction Act extended and meaningfully modified the §30C ITC
The §30C ITC existed prior to the Inflation Reduction Act (IRA), and the guidance reminds us of the ways in which the IRA modified the credit.
Added prevailing wage and apprenticeship requirements
The §30C is subject to the IRA's prevailing wage and apprenticeship (PWA) requirements. If a developer meets PWA requirements, the §30C credit value increases from 6% to 30% of eligible costs. Considering the economics, virtually all developers will meet PWA requirements.
Increased credit maximum
The IRA increased the maximum credit value that an eligible property can receive. For businesses, the cap is $100,000 per "item of property."
Modified eligibility scope
The IRA modified the scope of the §30C ITC "so that it no longer applies per location and instead applies per single item." Notably, although the guidance provides several definitions, it does not define what constitutes a "single item." We'll comment on this below.
Narrowed applicability to non-urban areas, low-income communities, and, with this guidance, U.S. territories
The IRA requires a §30C-eligible property to be placed in service in an eligible census tract – that is, any population census tract that is a low-income community, a non-urban area, or a U.S. territory.
TAKEAWAY 2
99% of U.S. territory is included in eligible census tracts
According to the guidance, three broad areas are eligible for the credit:
- Non-urban areas: For purposes of the §30C credit, the IRS defines a non-urban area as "any population census tract in which at least 10 percent of the census blocks are not designated as urban areas.” Many market participants have been referring to non-urban areas as "rural areas."
- Low-Income communities: The IRA defined a qualifying census tract as one described in Section 45D(e), which defines a low-income community for purposes of the new markets tax credit (NMTC). The guidance, however, notes that NMTC data was recently updated and provides a transition rule under which developers can rely on designations using the older or more recent data.
- U.S. territories: The guidance allows refueling properties located in U.S. territories to qualify for the credit. However, the property must be owned by a U.S. citizen, U.S. corporation, or a U.S. territory corporation. (Inhabited U.S. territories are American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.)
According to the Electrification Coalition, an industry group, the areas in which eligible property can be installed "will include approximately 99% of U.S. land territory and 62% of the population."
This is particularly good news for expanding electric vehicle adoption because, without the §30C tax credit, installing EV charging infrastructure can be prohibitively expensive in rural areas where there are fewer vehicles in the first place.
TAKEAWAY 3
Eligibility of a census tract depends on when a project is placed in service
The guidance also provided two appendices that list qualified census tracts depending on when a project is placed in service (PIS):
- PIS after 12/31/22 and before 1/1/25: Appendix A or Appendix B
- PIS after 12/31/24 and before 1/1/30: Appendix B
TAKEAWAY 4
DOE published a mapping tool to streamline siting analyses
To strengthen implementation efforts, Argonne National Laboratory within the Department of Energy (DOE) published a §30C Tax Credit Eligibility Locator mapping tool and an FAQ.
To help developers select the appropriate census tract for their project's placed-in-service date, Argonne accompanied the map with a decision tree.
The mapping tool, however, is for informational purposes only and "may not be relied upon by taxpayers to substantiate a tax return position and will not be used by the IRS for examination purposes."
TAKEAWAY 5
Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor
The guidance did not fully clarify what equipment constitutes a "single item" with respect to credit qualification. As Canary Media notes, electric vehicle "charging sites also have a lot of 'shared equipment' such as power conduits, switchgear, transformers and enclosures," and there are "still questions of whether [the credit] will cover just the charger, or additional factors to installation like upgrading power infrastructure."
The definitional ambiguity presents financial challenges for developers who want to transfer their tax credits because they don't yet know what their credits will be worth.
TAKEAWAY 6
Proposed regulations still to come from the IRS and Treasury
Fortunately, the guidance states that further guidance is forthcoming. Reunion believes this additional guidance will likely address the definition of a "single item," given the gating nature of its ambiguity.
Reunion
January 24, 2024
How Early Investors are Approaching IRA's New Tax Credit Regime: Additional Tax Credits Drawing Broad Interest
Inflation Reduction Act IRA transferable tax credits bring significant optionality to tax credit buyers.
For Buyers
Reprinted from the Novogradac Journal of Tax Credits
January 2024 – Volume XV – Issue I
Corporate income tax revenue was $425B in 2022, suggesting that if IRA tax credits reach $100B annually, monetizing these credits will require over 20% of annual corporate federal income tax to redirect into clean energy projects. Attracting new sources of tax-related capital into the market remains one of the major hurdles facing the renewable energy sector.
Congress attempted to lower the barriers to entry for attracting tax credit capital by introducing transferability – a transaction mechanism that allows for the purchase and sale of credits, rather than the more complex tax equity partnership structure.
So far, this solution appears to be attractive to corporate taxpayers. In 2023, the range of buyers interested in IRA tax credits has grown beyond the traditional appetite from banks, insurance companies, and some specialized financial services firms. This trend is explored further in Buyers Perspective on Transferable Tax Credits in 2025, which outlines how market dynamics are evolving and what buyers should consider moving forward.
IRA credits bring significant optionality to tax credit buyers
There are many different types of tax credits from which to choose. For example, there are two credit types – Internal Revenue Code (IRC) Section 48 investment tax credits (ITC) or IRC Section 45 production tax credits (PTC) – and 11 sub-credits spanning electricity generating technology, low carbon fuels, carbon capture and sequestration, and advanced manufacturing.
There is also a range of pricing discounts available that reflect the risk profile of a specific project. Buyers now have far more optionality around the attributes of the credits they are buying, and the transaction process itself.
Buyers can also choose from two different tax credit structures – a single-year ITC or a ten-year stream of PTCs. Single-year ITCs apply to the tax year in which the project was placed in service. This gives tax teams the ability to buy credits year-by-year to offset fluctuating or unpredictable tax liabilities. PTCs are generated alongside the physical output of the project (e.g., electricity, sequestered carbon, manufacturing components, etc.). This allows tax credit buyers to contract for either a spot purchase – i.e., the credits from a single period of output (usually one year) – or a forward commitment to a stream of credits. For taxpayers with a predictable amount of tax over a multiyear period, committing to a forward PTC, or “strip,” purchase can improve the economics of the transaction versus a single-year purchase.
In the current market, spot PTC purchases offer the smallest discount to face value, since they carry less risk compared to ITCs which have a recapture provision, whereas PTCs do not. Single-year ITCs typically offer the median discount and PTC strips offer the largest discount.
Optionality also comes in the form of purchase timing. There are two considerations here – first, most transferable credits are not paid for until a project is placed in service. This approach gives buyers the ability to require key conditions precedent to be met before funding and greatly reduces construction risk to the buyer while isolating the buyer’s exposure to pure tax credit-related risks. Second, buyers can still contract for credits prior to payment. Treasury guidance released in June 2023 formally allowed taxpayers to apply their “intent to purchase” credits to quarterly estimated payment, creating an opportunity to save on quarterly payments prior to laying out cash for a tax credit purchase.
Structuring purchases or payments around quarterly estimated payment days can deliver the best internal rate of return and cash management value. Contracting early in the year can often help buyers secure the best economics, even for credits that aren’t generated until later in the year. Ultimately, buyers should consider the timing of credit purchases as an additional benefit of transferability and plan accordingly for their own tax position.
Transferable IRA credits carry discrete, manageable risks
For early investors in IRA tax credits, risk mitigation should be the primary focus of a transaction process. In general, IRA credits carry the same risks as investing in pre-IRA wind or solar PTCs or ITCs. When investors buy these credits using transferability, however, they eliminate the structure risk associated with tax equity partnerships. This results in cleaner transactions, where buyers need to primarily focus on de-risking the credit itself, rather than the operating profile of the underlying asset.
For a transferable tax credit purchase, buyers must focus on two core risks:
- Qualification: Was the tax credit properly claimed?
- Recapture: Applicable only to Section 48 ITCs and Section 45Q PTCs (not applicable to other PTCs)
A Section 48 ITC is calculated on the cost basis of the energy property placed in service during the tax year. The IRS may challenge the cost basis of the energy property, and if this amount is ultimately reduced, the amount of ITCs from the project will be reduced as well, resulting in an excessive credit transfer tax to the transferee. Buyers will want to review detailed documentation that records the project’s cost basis, verified by a reputable third party accounting or legal firm. In addition, prevailing wage and apprenticeship requirements and any bonus credit adders will need to be verified.
To qualify for a Section 45 PTC, a project needs to generate electricity from a qualified energy resource during the ten-year period beginning on the date the facility was placed in service. Because the PTC is tied to production, the primary risk associated with PTCs is accurate production accounting. This risk is considered easily manageable because production is quantifiable and readily verified.
For a detailed look at how production tracking and verification play out in real transactions, see our Section 45 PTC transfer case study that highlights best practices and common pitfalls.
Recapture on a Section 48 ITC requires that (1) the property remains a qualified energy facility for five years, and (2) there is no change in ownership of the property for five years. In practice, there are three key risks that can be investigated with respect to recapture:
- Proper site control: ensure that the energy project will not be forced from the property by a current or new landlord, triggering a recapture
- Adequate property and casualty insurance: ensure that there is sufficient coverage such that the energy property will be rebuilt in the event of a casualty event
- Mitigate risk of recapture due to debt foreclosure: ensure that lender has agreed to forbearance agreement, or debt is structured in a way that does not trigger recapture in the event of a default
In addition, the seller will need to contractually assure the buyer that there will not be a change in ownership during the five-year recapture period, which the indemnity agreement will help ensure.
To protect against these risks, buyers will negotiate indemnifications from the seller, and may seek tax credit insurance as a backstop to protect the value of the credits. Working with experienced transaction partners familiar with renewable energy tax credits can ensure that risks have been properly diligenced and risk mitigation is in place in the event of a challenge from the IRS.
Common points of negotiation in tax credit transfer agreement
Unlike a tax equity investment where control rights are an inherent part of the negotiated partnership structure between a project developer and tax credit investor, transferable tax credits sold via a purchase-and-sale agreement don’t carry the same level of ongoing rights for a buyer. This means that buyers should identify the key points of negotiation they will want to include in a tax credit transfer agreement (TCTA).
Some common points of negotiation beyond price include:
- Timing of payments
- Audit participation rights
- Scope of buyer indemnification
- Tax credit insurance and who bears the associated costs
- Representations and warranties, and pre-close/post-close conditions precedent
Several of these are closely related to risk management and warrant additional explanation – namely, the scope of buyer indemnification and tax credit insurance.
Buyers will typically secure a broad indemnity that shifts most risks (and their associated costs) from the buyer to the seller. In a tax credit transfer transaction relating to a Section 48 ITC, the primary risks to which a buyer is subject are qualification and recapture. The price of the credit can vary depending on the strength of this indemnity – if a creditworthy guarantor or very large balance sheet (in comparison to the size of the credit) is providing the indemnity, tax credit insurance may not be required.
For instances where a buyer does want tax credit insurance, this cost is typically paid by the seller or the price of the credit is adjusted accordingly when the buyer is procuring insurance directly. Tax credit insurance can be a double-trigger policy that backstops the seller indemnity. So, if the seller fails to perform on the contractual obligations around a recapture or disallowance event, for example, the insurance policy steps in to make the buyer whole. Tax credit insurance is usually quite comprehensive and costs several pennies per dollar of credit.
Conclusion: discrete, manageable risks
The IRA created an attractive tax credit regime for corporate taxpayers to participate in the energy transition while managing their own federal tax liability over an extended period. While these credits are not certificated in the same manner as some state tax credits, they do bear the benefit of being transferable – vastly lowering the barrier to participation when compared with legacy tax equity investments.
The risks to these credits are not zero, but they are discrete and manageable through due diligence, seller indemnification, and products like tax credit insurance. Buyers can generally find ways to substantially de-risk these credits while still preserving sufficient value.
Andy Moon
January 19, 2024
Innovative Deals, Career Openings, and $4B in Tax Credits
Reunion's CEO shares several updates — from a first-of-its-kind tax credit transfer, to news of our marketplace crossing $4 billion in tax credit opportunities.
For Sellers
For Buyers
Q1 2024 Newsletter
January 22, 2024
Welcome to the new year and our Q1 2024 newsletter.
The transferable tax credit market is accelerating quickly, and so is Reunion. We have several updates we'd love to share you — from a first-of-its-kind tax credit transfer, to news of our marketplace crossing $4 billion in tax credit opportunities.
Tax credit transfers will drive a significant increase in clean energy deployment in 2024, and we look forward to keeping you up to date!
Andy Moon, CEO
An innovative tax credit transfer for commercial rooftop solar
Reunion celebrated the new year by facilitating an innovative tax credit transfer from a portfolio of commercial rooftop solar installations. The transaction represents the promise of transferability: enabling clean energy projects that have historically struggled to attract financing.
Major updates to our transferable tax credit handbook
We recently unveiled version 2.0 of our 100-page transferable tax credit handbook, after receiving fantastic feedback from the market on our initial release.
Our latest edition includes an overview of the IRA's 11 transferable tax credits as well as comments on the latest Treasury guidance.
Read our 2023-2024 pricing review and outlook
In January, our team published our inaugural pricing review and outlook, based on our transactional experience and hundreds of conversations with tax credit buyers and sellers. In the article, we share pricing observations from 2023 and predictions for 2024.
Our marketplace now features over $4B in tax credits
Our marketplace has grown rapidly since our launch in June 2023. We now have over $4B of tax credits available across solar, wind, battery storage, advanced manufacturing, and other clean energy technologies.
Reunion is hiring
Our team continues to grow! We have several open positions available and would love your help finding great folks.
Stay tuned on LinkedIn
You can catch our latest insights and news on LinkedIn. We hope you’ll follow us and join the conversation.
Reunion Accelerates Investment Into Clean Energy
Reunion’s team has been at the forefront of clean energy financing for the last twenty years. We help CFOs and corporate tax teams purchase clean energy tax credits through a detailed and comprehensive transaction process.
