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

Introduction

In episode 6, Reunion's CEO, Andy Moon, chats with Craig Smith of Wiley Rein to understand how buyers and sellers of transferable tax credits can borrow lessons-learned from the Davis-Bacon Act when navigating the IRA's prevailing wage requirements. The episode includes Craig's view on the November 2023 §48 ITC guidance, which included key PWA updates.

In Craig's view, it's important for transacting parties to strike the right balance between information and enforcement.

‍

Guest: Craig Smith, Wiley Rein

Craig Smith is a partner at Washington, DC-based Wiley Rein. Craig has dedicated a significant portion of his practice to the Davis-Bacon Act, which has several key parallels to the prevailing wage and apprenticeship requirements in the Inflation Reduction Act.

‍

Listen on Spotify or Apple

10 Questions with Reunion is now available as a podcast on Spotify and Apple.

‍

Video

‍

Chapters

0:00 – Introductions

1:47 – Question 1: What are the PWA requirements for the purposes of IRA tax credits?

2:33 – Question 2: Are there substantive differences between the PWA requirements under the IRA and the Davis-Bacon Act?

3:29 – Question 3: How will the recent major updates to the Davis-Bacon Act – the first in almost 40 years – impact buyers of IRA tax credits?

5:27 – Question 4: What's the process for complying with DOL requirements?

7:46 – Question 5: How does a developer ensure they are using the correct timing of a wage determination?

8:55 – Question 6: How are developers documenting PWA?

10:09 – Question 7: How are buyers mitigating the risk of deviations from PWA requirements? How deep should they go with diligence?

11:42 – Question 8: What should developers keep their eyes on with respect to documenting PWA?

13:09 – Question 9: What is the role of consultants when it comes to documenting PWA compliance?

16:02 – Question 10: Under the Davis-Bacon Act, has it been common for a contractor to require subcontractors to submit certified payroll?

17:04 – Question 11: How does the PWA "cure period" work?

20:54 – Question 12: What is the after-the-fact process for locating and properly compensating a worker who was underpaid?

23:05 – Question 13: Any parting wisdom?

24:08 – Question 14: What has been the role, if any, of insurance when prevailing wages were not paid under the Davis-Bacon Act?

25:45 – Question 15: What should the clean energy market know about the November 2023 PWA guidance?

26:44 – Question 16: What can you tell us about the annual PWA reporting requirement during the recapture period?

27:25 – Question 17: The November Section 48 ITC guidance did not reference to the use of apprentices during the recapture period. Any insights on whether apprentices are a requirement for the alteration and repair period?

28:32 – Question 18: Any closing comments?

‍

Transcript

Introductions

Andy Moon: Hello and welcome to another episode of 10 Questions with Reunion. My name is Andy Moon, and I'm the co-founder and CEO of Reunion, the leading marketplace for clean energy tax credits. We work closely with corporate finance teams to purchase high quality tax credits from solar, wind, and other clean energy projects.

Today's guest is Craig Smith, a partner at the law firm Wiley Rein in Washington, D.C. Craig has significant experience in prevailing wage issues for federal contractors. 

We are excited to have you on the show, Craig. Can you start by sharing a brief introduction on you and your practice?

Craig Smith: Thanks so much, Andy. Delighted to be here. It feels just like just yesterday I got thrown into the world of federal prevailing wage requirements with the American Recovery and Reinvestment Act of 2009, which many people may remember pumped billions of dollars into the economy through grants and other agreements.

My practice has expanded to other types of prevailing wage requirements, which we're going to talk about today, in both the federal contracting space and other vehicles ever since. 

Andy Moon: This is a hot topic for many clean energy developers. For many of the current projects selling IRA tax credits in 2023, they tend to be exempt from prevailing wage and apprenticeship requirements, otherwise known as PWA, because construction on these projects started prior to January 29th, 2023. But PWA compliance is becoming a big topic for 2024 projects, which requires diligence.

Question 1: What are the PWA requirements for the purposes of IRA tax credits?

Andy Moon: Craig, will you summarize PWA requirements for the purposes of IRA tax credits?

Craig Smith: Sure. I think the key term to keep in mind is “Davis-Bacon Act,” which is what all this is based on. It's a nearly hundred-year-old law that directly imposes requirements to pay certain wages and fringe benefits to the laborers and mechanics – which are general terms – who work on federal construction projects.

That requirement has expanded to all sorts of other projects over the years, but the key points are the same: In a given area, you must pay certain wages and fringes to certain classes of workers over the lifespan of the project.

Question 2: Are there substantive differences between the PWA requirements under the IRA and the Davis-Bacon Act?‍

Andy Moon: Are there substantive differences between the PWA requirements under the IRA and the prevailing Davis-Bacon wage requirements?

Craig Smith: It's a bit like if my son were to come to me and say, “Dad, you don't have to pay me an allowance, but every week you have to give me $5 for not doing anything.”

I've been hearing this argument that you just have to pay wages in accordance with the Davis-Bacon Act – you don't have to comply with the Davis-Bacon Act. For most folks, there's no real trade space between those two.

For a lawyer like me, who's thinking about enforcement and working with companies directly, there are some differences in the administration, record-keeping, and other obligations.

And the implementation has, so far, recognized these differences. By and large, though, if you're  thinking about what you need to make sure that people are getting paid, I don't see too much difference.

Question 3: How will the recent major updates to the Davis-Bacon Act – the first in almost 40 years – impact buyers of IRA tax credits?

Andy Moon: That’s very helpful. On that note, the first substantive updates in almost 40 years to Davis-Bacon and related acts became effective recently. Were there any major changes? If so, how will this impact buyers of IRA tax credits?

Craig Smith: There are two that should draw the [clean energy] market’s attention, both of which will take some time to be more salient and will require attention and diligence.

One is that DOL has reverted to a prior method of calculating the prevailing wage. They have certain methodologies where they ask, “Are most people in an area making a single wage rate?” For the last 40 years, if the answer was no, DOL just took a weighted average.

DOL has reinserted in that methodology a 30% threshold – a big plurality, if you will. Where I think you're going to see that make a difference is in geographic areas where there's a fair amount of union labor, but not a majority. At some point in the next few years – perhaps next year, perhaps in five years – the wage rate for iron workers or electricians pops up to reflect that change. Not a today change or a tomorrow change, but something developers need to account for.

The other change is that the site of the work that's covered – who's in the area where you must pay the wages – is steadily expanding. As modular construction continues to grow, the Department of Labor is focused on getting the same kinds of work covered at these secondary sites of work.  

It's going take a little while to see how these [site] changes play out in practice. If you are – to use an easy expression – delivering the windows for the building, [historically] that's just supply. I think when you start assembling things offsite, it's going to get more complicated and require more attention.

Question 4: What's the process for complying with DOL requirements?

Andy Moon: Let’s go into some practical details. Let’s say you’re a developer and trying to make sure you get the correct labor calculation. How should you think about the geography of work, and what’s the process for ensuring that you're complying with DOL requirements? 

Craig Smith: Geography is the easiest place to start because wages are set first by geographic area under the Davis-Bacon Act. Counties are the most common dividing line. For example, you'll see a given county is in wage determination 12345, along with three or four other counties. (There are some projects that, of course, cover multiple counties or other geographic areas. But let's save that for the 201 interview. For now, you can just think about one county.)

Then you must understand what kind of work is being done, because there are four Davis-Bacon wage determination types. They're fairly self-explanatory – building, highway, residential, and heavy. Of course, at the edges, it can get tricky. But DOL has provided some guidance that solar and wind projects should use heavy.  

When you click through the website where these are published, www.sam.gov, you'd start with heavy. Then, you look at who's going to do the work. DOL has recognized we don't have a labor category for installer of solar panels or fabricators of wind turbines. So, really distilling – do we have electricians? Do we have iron workers? What are the trades involved? From there you go down, and it'll have a wage rate and a fringe benefit rate.

A key factor to bear in mind is fringes can be paid as part of a cash wage. A developer doesn’t have to run out and sign everyone up for a 401(k) and a health plan. Instead, the dollars they’re spending per worker per hour must match up with what's in that wage determination. 

Question 5: How does a developer ensure they are using the correct timing of a wage determination?

Andy Moon: Another common question is the timing of the work. You mentioned that the prevailing wage for ironworkers might increase. How does the developer ensure that they are using the correct timing of the wage determination?

Craig Smith: The lodestar is when construction of the facility begins or the other work where the installation work is being done.There are cases at the edges, but for getting familiar with the concept, a developer should think about when they are going to start swinging hammers or digging shovels.

What's important to realize is you'll be able to go online and see the wage determination today. The challenge, then, is you'll already have the contracts, you might have already bought long-lead items, you already have pricing – the project is going to be well-advanced.  

Therefore, understanding the mechanism to confirm you have the right wage determination and if there are any changes [will be important]. That process exists for a federal construction contractor who, say, gets a contract from the General Services Administration to construct a building. It's a little painful, but everyone knows what it is. Under the IRA, [the process is less defined]. It’ll be important to have a plan if that situation arises. 

Question 6: How are developers documenting PWA?

Andy Moon: How are developers currently documenting this PWA?

Craig Smith: There's a wide range of ways to do it. Let me give you some context from Davis-Bacon, which has been around for a long time.

Some companies do it in a manual way, perhaps in Excel. They have an admin who keys all [the information] in. Some have automated systems. Others rely on payroll and plan to extract the data (although I'd say make sure you can do that before you try it).

As you get further and further down the subcontracting chain – and this is important to realize – some companies are flatly unaware of [the requirements]. A partner of mine and I were on a project some years ago, for example, and we were talking with a third- or fourth-tier subcontractor who had never heard of the Davis-Bacon Act.

This is critical for a taxpayer [who is buying tax credits] to know because they are one step further removed from a prime contractor or general contractor.

Question 7: How are buyers mitigating the risk of deviations from PWA requirements? How deep should they go with diligence?

Andy Moon: Because the taxpayer is the one that's on the hook for deviations from the PWA, how are buyers mitigating risk? Are there situations where they can rely on the representations from the EPC or construction company? How deep does the buyer need to go on the diligence side?

Craig Smith: People get into this business because they have some appetite for taking risks and investing. I think buyers need to think carefully about their appetite for risk and the information available to them.  

A compliance lawyer would say you must have detailed documentation of every hour worked by every person on this project. You must have contact information. You must know what's going on week by week because that's the gold-plated way to make sure you're handling compliance. But, as your investors and buyers probably know, you pay for that.  

So, the question is, what's your risk tolerance? A certification may be effective if it's a company you know is familiar with Davis-Bacon or it's a tax credit seller who's using a contractor you know is sophisticated.

I think it’s the right blend of information and enforcement that's going to work with me where the investment still makes sense.

Question 8: What should developers keep their eyes on with respect to documenting PWA?

Andy Moon: We’ve heard that contemporaneous documentation is one of the key elements in ensuring that documentation is sufficient. What are some other points that you would advise developers to keep an eye on as they are documenting PWA?

Craig Smith: Let me give you a variation of that contemporaneous documentation item, which is you've got to make sure everyone knows that this requirement applies. How would someone who's just there to install solar panels know? So, the first consideration is making sure everybody knows what we're supposed to be doing in terms of wages.

Then, you want to understand how these [construction] companies are tracking payroll. What [information] are they accumulating? Maybe [the developer] is not getting the information on a real-time basis, but they should understand the [payroll] process, so they can go back and reconstruct it.

You don’t want to hear, “We had some electricians who came in and paid their guys in cash, and they've all disappeared to the wind.” You don’t want to end up $5 per hour short on a multimillion-dollar tax credit and be unable to find the workers.

Question 9: What is the role of consultants when it comes to documenting PWA compliance?

Andy Moon: I understand what you say when some developers are tracking this manually with spreadsheets, while others are using their certified payroll. What is the role of consultants when they are involved in ensuring that PWA documentation is happening?

Craig Smith: Let me talk about that certified payroll term for just a second, because that may be new to a lot of folks. Under the Davis-Bacon Act itself (and some of the “related acts” that impose the requirements), every week a contractor and subcontractor who are covered has to prepare what's called a “certified payroll,” which lists out all the Davis-Bacon covered workers, their hours by day, how much they got paid, and someone certifies under the Federal False Statements Act that Davis-Bacon wages and fringes have been paid. You can think of that, again, as a gold standard.

But [certified payroll] is not required under the IRA. That's clear. However, the government will tell you it’s a really good idea.

So, when understanding what kind of information you might get, you might see some companies give you certified payrolls, or maybe they use the certified payroll form. Viewers can see the PDF online by searching WH-347. Some companies are sending PDF after PDF. Other companies have moved ahead in how they handle it.

With that context in mind, consultants can help on a few fronts. They can help you wrangle all the information because you might be learning this on the fly. If it's a more construction-oriented consultant, they can help you assess if the labor categories that a contractor has chosen are realistic. Are these workers, for instance, really journeyman ironworkers?

You could also have consultants who help with automating the process of consolidating unstructured data. They could take whatever [data] they get from the general contractor – who's just going to roll up everything from the subs – and put it into a single, clean report. You could, for enough of these projects, have a consultant who builds a light website that handles this.

There is a range of services out there that someone could build, depending on their familiarity with the Davis-Bacon Act. Perhaps they are just technically proficient and can help you automate a workflow. 

Question 10: Under the Davis-Bacon Act, has it been common for a contractor to require subcontractors to submit certified payroll?

Andy Moon: Going back to certified payroll, has it been common under the Davis-Bacon Act for a contractor to require subcontractors to submit certified payroll?

Craig Smith: It’s a contractual requirement, so there's no getting around it. Think of a reverse cascade: payrolls are supposed to make their way to the contracting or the grant-making agency.

If you have a contractor who is familiar with the federal space, they may be the simplest pathway because they already have a workflow for it. Others might say, “We do [certified payroll] for federal projects, but we are not doing them for your project.”

Certified payroll gives you a frame of reference for the type of information you’ll want to have for in-process monitoring and if there are questions five years later when the IRS comes calling to reconstruct what happened.

Question 11: How does the PWA "cure period" work?

Andy Moon: One item that's been talked about a lot in the context of IRA credits is the cure period. If a taxpayer or a developer is determined that workers were not paid prevailing wage, the tax credit is not automatically repealed. There is a chance for the prevailing wage failure to be cured by paying the worker the difference in wages plus an underpayment rate plus an additional $5,000 for each worker that was underpaid. Can you comment a bit on the cure period and, practically, how would it work?

Craig Smith: My comments are generally about how poorly thought out this is. Let me try, however, to help folks think about how to approach the cure mechanism. I’ll contrast it with a regular Davis-Bacon project where, even with the most compliance-oriented companies, people get underpaid. This is hard. So, I want people to understand that this is going to be really hard because you don't have some of the infrastructure from federal projects.

Typically, under Davis-Bacon, the Department of Labor would determine that, let’s say, some workers were paid wages from an outdated version of a wage determination. You would owe them all $2 an hour more for some number of hours, and you would remit the funds. Then, if you can’t find the workers – and this is also true in the services space – you can pay the money over to DOL, and they will try to find the workers.

So, there are two principal differences for any type of cure. One, the proposed guidance is written as though the [buyer] is paying [the cure]. Although the tax credit investor is technically responsible – I think everyone understands that – they don’t have an employer and/or independent contractor relationship [with the workers].

Some companies, especially if they’re publicly traded, have internal controls. It'd be a nightmare for them to pay the workers because they’re not their employees.

I hope that, as the [PWA] rules get finalized by the Internal Revenue Service, this will get fixed. (The comment period is open). If not, taxpayers may need to think about how they’re potentially going to be paying people.  

The second principal difference is the mechanism for paying workers you can't find. It's one thing in the middle of a project to realize there's been a mistake, and you're able to arrange for a back payment. It’s another thing when the project is over – perhaps there's a challenge to the tax credit years later. In this case, you’re trying to find the workers.

So far, all the IRS has said is in their proposed rulemaking is, “Look to state law for how you would pay these people.” I find that deeply unsatisfying, and I hope that gets resolved by the time anyone has these issues.  

The good news, as you mentioned, is we're just now starting to see projects come online that are subject to these requirements. It's going to be some time before we're trying to do after-the-fact fixes.

Right now, projects should have mechanisms in place for validating in-process compliance. They should be able to handle shortfalls in the ordinary course of back pay, whether it's on a paycheck or a special payment. It's going to be a lot easier to catch these [shortfalls] in the moment. 

Question 12: What is the after-the-fact process for locating and properly compensating a worker who was underpaid?

Andy Moon: If there was an underpayment on prevailing wage, I assume the first course of action would be for the developer to make the buyer whole because the developer has a fulsome indemnity. The developer would have a strong incentive to play a role in curing the underpayment of wages.

If that is not able to happen, I thought you had mentioned that the penalty can be paid to the DOL, which will make their best effort to locate the folks who were underpaid. Can you talk through those mechanics? 

Craig Smith: That's how we work in the ordinary course of a Davis-Bacon project. [With the IRA], we don't have that mechanism. Instead, let's say I'm a developer or an investor, I have an uncooperative general contractor, and I don’t have legal recourse. In this case, it’s important to know where the project is located and to engage local counsel who’s familiar with construction projects in that jurisdiction.

This won't be the first time that workers are discovered to be owed money after the fact [in that jurisdiction]. So, for the time being, the best advice we have is look to state law, just like the proposed rules from the IRS say to do. It's not a satisfying solution, but it's the best one that we have. 

The other point to consider is that, although they’re on opposite sides of the bargain, the developer (the seller of the credits) and the buyer have aligned interests. They both want to ensure everyone’s getting paid the correct rate. As you move further from that core transaction under the IRA, however, people have other things to do in life. So, you ultimately need to make sure that everyone is rowing in the same direction.

Question 13: Any parting wisdom?

Andy Moon: Craig, you've been in this space for along time. Is there anything that I could have asked or anything that we missed in this discussion today about prevailing wage?

Craig Smith: I want to reemphasize that companies who spend a lot of money to get this right still run into difficulties. So, [developers should] want to understand PWA requirements from a practical perspective.  

Before they start trying to quantify the risk and model it out, they should think about the right balance of information and enforcement. Some companies might look at this and determine they prefer a strong [with] liquidated damages. Others may want to be more proactive based on their comfort and understanding. But if you just look at this as, “Make sure people get paid the right wages and fringes,” that should take care of itself.  

I have a career in this field for a reason. It's because it's hard to do, even for those who work hard to get it right.

Question 14: What has been the role, if any, of insurance when prevailing wages were not paid under the Davis-Bacon Act?

Andy Moon: That's good feedback, Craig. I'd like to bring up a final item. Tax credit insurance is one area that buyers are using to mitigate risk on these projects. And tax credit insurance does cover qualification of the credit, which would include verification of prevailing wage and apprenticeship requirements.  

How have you seen this play out in Davis-Bacon projects where it’s been determined that prevailing wage was not paid. Has there been insurance available and, if so, how has it mechanically worked?

Craig Smith: It's a too early to see how it's playing out because we're less than a year in. I think this is a question for this time next year when we’ll see how [insurance] is getting bought and sold and if we’re running into these kinds of issues.

If nothing else, we'll have had our first tax filing season, and you can pay someone prevailing wages right away if there's a shortfall. The $5,000 or greater penalty wouldn't be due until tax day, so there is a time lag before we start seeing what's the reality on the ground. 

Andy Moon: Thanks so much, Craig, for coming on the show today. It's great to learn from your experience of working on federal contracting issues and certainly hope to work with you in the future.

Craig Smith: Thanks so much, Andy. This was a blast. Really appreciate it.

Question 15: What should the clean energy market know about the November 2023 PWA guidance?

Andy Moon: Hi, Craig. Happy new year – great to see you again.

Craig Smith: Great to be back.

Andy Moon: The IRS issued an update to Section 48 ITC guidance in November 2023, and it included some updates to the prevailing wage and apprenticeship guidance. We would love for you to give an overview to our audience on what they should know about the PWA.

Craig Smith: When we recorded questions 1 through 14, I said there were a lot of PWA pieces and processes that still had to be defined. Without going into too much granularity, the latest guidance brought some of those pieces together – in particular, around reporting and record-keeping.

There are some pieces, however, that may take more time. For example, we don't know how, in practice, the IRS is going to handle the returns that will include these tax credits. How the IRS will handle disputes is also an open question.

But it still felt like things are starting to come together.

Question 16: What can you tell us about the annual PWA reporting requirement during the recapture period?

Andy Moon: Is there anything in particular that buyers and sellers should be aware of? For example, there was a specific requirement for an annual PWA compliance report to the IRS. What does that look like?

Craig Smith: It's similar to an aggregated report of wages. Perhaps not surprisingly, the November update drew a parallel between the reporting requirements during the construction phase with the reporting requirements during the alteration and repair phase – that is, the recapture period – of a qualifying facility.

Question 17: The November Section 48 ITC guidance did not reference to the use of apprentices during the recapture period. Any insights on whether apprentices are a requirement for the alteration and repair period?

Andy Moon: On the topic of the five-year recapture period, the November guidance did not have any references to the use of apprentices during this period. Any insights on whether apprentices are a requirement for the alteration and repair period on 48 ITCs?

Craig Smith: One of the things that I do as a lawyer is go back to the start with the source text. And I'd say that is an area that isn't as crisply written in the IRA as some of the others when it comes to prevailing wage and apprentices.

For companies that are looking to be in this market, they should be focused on a final answer from the iRS in the Federal Register. And then any challenges to that, one way or the other, will take time to play out.

I think the most important thing to say is, "If we want to be risk averse, we should probably plan for apprentices." If that's not the direction you're going in, then you should have a plan ready if apprentices are part of the ultimate outcome. Within that plan, allocating risks and responsibilities will be an important discussion point.

Question 18: Any closing comments?

Andy Moon: Anything I haven't asked that I should have?

Craig Smith: I think it's important to pay attention to the Department of Labor, which recently published substantially updated Davis-Bacon rules. The market should follow these in-the-field developments.

Said differently, we don't want to over-focus on the IRS. We should keep an eye on Davis-Bacon rules and keep in mind that that there are changes afoot, even if they might feel like they're not quite as forefront as record-keeping or reporting.

Andy Moon: Thanks so much, Craig.

Craig Smith: Thanks for welcoming me back, Andy.

Advanced Power Announces Investment Tax Credit Purchase

Purchase demonstrates commitment to a sustainable energy future

Provided by Advanced Power

January 3, 2024

‍

BOSTON, January 3, 2024 – Advanced Power continues to show its commitment to advancing a sustainable energy future with its purchase of renewable energy investment tax credits (ITC). The credits were made available through the development of rooftop solar facilities offered for sale by a third party.

“Advancing a sustainable energy future drives our actions,” said Advanced Power’s CEO Tom Spang. “We are pleased to close this latest transaction, which supports our vision of a clean, reliable energy future.”  

The 2022 Inflation Reduction Act (IRA) made the transfer of renewable energy tax credits possible. The IRA aims to accelerate the transition to a clean energy economy and drive increased deployment of new, clean electricity resources. Section 6418 of the Internal Revenue Code allows for the transfer (sale) of certain renewable energy tax credits from renewable energy project developers to a qualified third party.

“Advanced Power is a developer, owner, and asset manager of modern power infrastructure and has now made a tax equity investment and completed a tax credit transfer transaction. We are positioned to execute similar transactions soon,” added Spang.

Reunion, a technology-enabled finance company that helps guide corporate tax teams through the clean energy tax credit transaction process, originated the opportunity for Advanced Power and facilitated the transaction between the parties.

‍

Advanced Power focusing on further U.S. renewables development

Advanced Power manages all aspects of an energy project's life cycle, including development, construction, financial structuring, and operations. A robust renewables pipeline across Desert Southwest, ERCOT, PJM, and MISO is underway. Late-stage projects in the pipeline include:

• ‍Eldora Energy – 240 MWdc solar with an additional 200MW/400MWh battery storage facility
• ‍Alina Energy – 220 MWdc solar with an additional 200MW/400MWh battery storage facility
• ‍Elio Energy – 300MW/600MWh battery storage facility
• ‍Rock Rose Energy – 200MW/400MWh battery storage facility

For more information about Advanced Power, its energy projects, and its expertise in development, financial structuring, and asset management, please visit www.advanced-power.com.

‍

About Advanced Power

Advanced Power is a privately owned global developer, manager, and owner of modern power infrastructure. The company develops low-carbon and renewable electric generating projects as an independent power producer. Advanced Power’s successes include 11 gigawatts in development or operations in the United States and Europe. The company has offices in Boston and Houston, with a registered office in Zug, Switzerland.

Founded in 2000, Advanced Power is focused on advancing a sustainable energy future, bringing reliable energy to places that need it, and providing economic benefits plus jobs to communities while making massive contributions to reducing CO₂ emissions.

In early December, the IRS launched a webpage for its pre-filing registration tool. As of this post, the actual tool is "unavailable to the public."

However, developers who want a head-start can review the portal's user guide to get a clear sense of what to expect – including the IRS's recommended 120-day review timeline.

‍

Reunion's key takeaways from the pre-registration portal user guide

• Takeaway 1: The IRS pre-registration portal is not yet open, but the user guide discloses the portal's data and documentation requirements
• Takeaway 2: The IRS does not issue a registration number until the review is complete, and the IRS recommends at least 120 days for review
• Takeaway 3: Projects must be placed in service before submitting a registration‍
• Takeaway 4: For every credit, the portal requires standardized information about the registrant‍
• Takeaway 5: The portal includes credit-specific requirements, including a "non-exhaustive" list of documents. (Navigate directly to a credit's requirements: §30C, §45, §45Q, §45U, §45V, §45X, §45Y, §45Z, §48, §48C, §48E)‍
• Takeaway 6: Developers will need a registration number for each facility/property‍
• Takeaway 7: A registration number does not mean a registrant qualifies for a credit of any specific amount

‍

‍

TAKEAWAY 1

The IRS pre-registration portal is not yet open, but the user guide discloses the portal's data and documentation requirements

In early December, the IRS launched a webpage for its pre-filing registration tool. As of this post (December 18, 2023), however, the actual tool is "currently unavailable to the public."

Although the portal is not yet live, developers can get a preview of the tool's look, feel, and workflow through the Pre-Filing Registration Tool User Guide and Instructions.

The 69-page guide includes step-by-step instructions for registering each facility/property, including a bulk upload functionality – complete with a spreadsheet template – for the §30C, §45, and §48 credits. (The template is not yet available.)

‍

‍

TAKEAWAY 2

The IRS does not issue a registration number until the review is complete, and the IRS recommends at least 120 days for review

The IRS does not issue registration numbers until the application has been reviewed and marked as "Returned - Closed." The registration field will go from "pending" to an alpha-numeric string.

The guide counsels registrants to submit their pre-filing registration at least 120 days prior to when they plan to file their tax return. 120 days "should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers."

Importantly, 120 days is the IRS's current recommendation, suggesting this timeline could vary. Developers should prudently assume 120 days is the minimum.

‍

‍

TAKEAWAY 3

Projects must be placed in service before submitting a registration

The guide states, "Before a facility/property can be registered to make a transfer election...that property or facility must have been placed in service no later than the date the registration is submitted." However, nothing prevents a registrant from getting a head-start on a draft submission.

‍

‍

TAKEAWAY 4

For every credit, the portal requires information about the registrant and allows for "additional information, if any"

All registrations must provide the following "general information" about the registrant:

• Tax period of the election
• EIN
• Name associated with EIN (as it appears on tax return)
• Parent of consolidated group?
• Registrant type (C corporation, sole proprietorship, etc.)
• Address
• Bank account information (account number, routing number)
• Type(s) of prior-year return(s) filed (Form 1120, Form 1040, etc.)

The portal also allows for "additional information, if any" as unformatted text. This field is optional but allows for the collection of "any additional information the registrant may wish to provide to identify a specific property or facility." In general, registrants should consider this field an opportunity to address any potential questions about their submission. Registrants should remove as much uncertainty in their application as possible.

‍

‍

TAKEAWAY 5

The portal includes credit-specific requirements, including a "non-exhaustive" list of documentation

Depending on the type of credit a developer is registering, the portal will ask for specific data – the date construction began, for example – and a "non-exhaustive" list of supporting documentation.

According to the guide, "Supporting documents will usually be relatively short documents, such as permits, title documents, [and] sales documents (showing the name of the registrant, date of purchase, and identifying information such as serial numbers)." On several occasions, the user guide states, "Do not attach detailed project plans or contractual agreements."

The guide does not list requirements for credits that are pending:

• §45Y – Clean electricity production credit: Applies to facilities placed in service after 12/31/2024
• §45Z – Clean fuel production credit: Applies to transportation fuel produced after 12/31/2024
• §48E – Clean electricity investment credit: Applies to facilities placed in service after 12/31/2024

Scroll to a credit: §30C | §45 | §45Q | §45U | §45V | §45X | §45Y | §45Z | §48 | §48C | §48E

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

TAKEAWAY 6

Developers will need a registration number for each facility/property

Developers will need a separate registration number for each facility/property, depending "on how the credits must be computed and reported on the source credit form and Form 3800."

The source forms for each credit are as follows:

Transferable tax credit source form links

Here are links to available source credit forms for transferable tax credits. Some forms, like 7213, are in draft as of this post (December 11, 2023): 

1. §30C (Alternative fuel refueling property credit) – Form 8911
2. §45 (Renewable electricity production credit) – Form 8835
3. §45Q (Carbon oxide sequestration credit) – Form 8933‍
4. §45U (Zero emission nuclear power production credit) – Form 7213. As of December 2023, this form is draft
5. §45V (Clean hydrogen production credit) – Form 7210. As of December 2023, this form is draft
6. §45Z (Clean fuel production credit) – Form 8835. As of December 2023, this form is pending a future revision
7. §45X (Advanced manufacturing production credit) – Form 7207
8. §45Y (Clean electricity production credit) – Form 7211. As of December 2023, this form is pending
9. §48 (Energy credit) – Form 3468
10. §48C (Qualifying advanced energy project credit) – Form 3468‍
11. §48E (Clean electricity investment credit) – Form 3468. As of December 2023, this credit will involve a future form revision

‍

‍

TAKEAWAY 7

A registration number does not mean a registrant qualifies for a credit of any specific amount

The guide reminds registrants that the portal demonstrates an "intent to monetize" a credit. A registration number, in other words, "does not mean that the registrant has been determined to qualify for a credit of any specific amount."

To monetize a credit, a developer must meet other requirements to make a valid election, including:

• Reporting the credit on the applicable source credit form (see list above)
• Completing Form 3800
• Fully executed transfer election statement
• Attaching these forms to a timely-filed tax return

‍

QUESTIONS

Interested in learning more?

To learn more about the pre-registration portal or the IRA tax credit market it supports, please contact Reunion.

Download the PDF

‍

To Market, To Market: Tax Credit Transfers Start Rolling Along

Reprinted with permission from Tax Notes - Volume 181 | October 30, 2023

By Marie Sapirie

‍

The Inflation Reduction Act opened the market for buying and selling energy tax credits by creating a new asset class. One result of that innovation was the launch of new marketplaces in which buyers and sellers can transact. A novelty in the federal tax area, tax credit marketplaces are working to establish themselves as a key aspect of the implementation of both the new and the dramatically revised energy credits.

The objective of the marketplaces is to facilitate credit transfer transactions by bringing buyers and sellers together and helping them complete their deals efficiently. The early deals appear to be mostly dominated by established participants in the traditional tax equity market, but the founders of the new marketplaces see a chance to both assist in those transactions and turn the untapped potential of smaller projects and new credit purchasers into completed deals.

New market, new marketplaces

As the recent spate of announcements has heralded, the market for credit transfers is taking off. “There are very few tax planning strategies that can have as large an impact as this can have for a single transaction, but it’s all based on scale,” Gabe Rubio of BDO USA LLP said. Where marketplaces fit within the credit transfer market is still being determined, but there are indications that they’ll play an important role.

“There has been an awesome amount of demand from clean energy project developers,” said Andy Moon of Reunion, an energy tax credit marketplace that launched this year. His company currently has $3 billion in credits from hundreds of developers on its platform from leading solar, wind, and other project developers. Moon said that because of the shortage of available tax equity and the complexity involved in tax equity partnership structures, there is a growing realization that transfers will be an important part of the financing toolkit for all developers.

One of the challenges is that the population of sellers is reasonably well defined, but the population of potential buyers is not. “People are interested and are feeling out the market but are trying to figure out how the process works and figuring out what they need in order to be able to transact,” said Seth Feuerstein of Atheva, another credit marketplace. For the sellers’ part, they’re often learning what buyers want, he said. That learning process will continue as the market matures.

By educating buyers and sellers and making transactions significantly less onerous than tax equity deals, the marketplaces hope to help the market mature faster. Moon said Reunion is focused on educating market participants and ensuring that transactions are done properly and are good experiences for buyers and sellers. “Part of why we’re interested in providing our knowledge to the market, including to our competitors, is that if there is fraud or recapture, that’s bad for us too,” he said.

The transactions facilitated by the marketplaces still involve outside counsel for each party to the deal. Moon said that Reunion helps lower expenses for buyers and sellers by guiding the due diligence process and providing a starting point with standardized documents that the parties and their counsel can customize through negotiations. There are additional benefits to having a nonparty facilitator whose role is to efficiently move the transaction to closing, he noted. For example, he explained that while developers may seek higher-than-market sales prices initially, Reunion has been able to bring its market expertise to the table to help buyers and sellers achieve a price that makes sense. “The go-between role is important,” he said.

Moon said that the long-term vision for Reunion’s role in the market is to be a place where many buyers and sellers can transact regularly in an auction style and to offer buyers the ability to purchase a portfolio of many projects. “Right now, buyers want projects with scale, but by the time we get to the later part of 2024, one thing that we anticipate is more, smaller projects with larger discounts,” he said. The key to those deals will be risk mitigation.

The marketplaces might also carve out a niche as matchmakers between buyers and sellers who don’t already know each other by helping them to find the right deal partners. Rubio said that the marketplaces could provide a valuable service to clients that have very specific parameters.

Transfers on the rise

Both on and off of the marketplaces’ platforms, credit transfers have taken off. Rubio said his firm closed transfer agreements of just under $300 million in credits in September. “VPs of tax are starting to wake up to this, as are developers, and it is becoming a very relevant tax and cash planning strategy,” he said. That growing awareness is why the credit transfer market is on an upward trajectory.

Moon predicted that the rest of 2023 and early 2024 will continue to see bilateral transactions, as the process becomes more familiar to purchasers. “Once a company and their finance team get comfortable with the process, there’s no reason not to continue to transact at equal or larger volumes in future years,” he said.

The market is currently heavy on solar projects, probably because that technology is among the most prevalent and there are many small solar projects that drive up the numbers, said Feuerstein. He added that developers have shown a preference for selling investment tax credits because they generate more income for the seller, but production tax credits are actually easier to sell because of the lack of recapture risk. So far, there doesn’t appear to be much of a difference in sales price between ITCs and production tax credits.

Risk mitigation is one of the major focuses of the credit marketplaces. Treasury and the IRS stated in the proposed regulations that the risk of recapture should be on the buyer, with a few exceptions in the case of partnerships and S corporations, but they allowed transferors to indemnify transferees. The focus in deals is now on mitigating the recapture risk through insurance and guarantees that let buyers feel more secure about their purchases. “All of our agreements put the burden of recapture on the seller,” Feuerstein said.

No portal

The IRS says it expects to open a registration portal for credit transfers by the end of the year, the main missing link in the transfer process. Credits sold today still have to be registered. Uncertainty about what exactly that prerequisite will entail is causing some additional friction in the market, but it’s “more of a hurdle than a barrier,” Feuerstein said.

Pricing

The price range for credits is still fairly wide, but it’s starting to crystallize, and it will probably narrow over time. “The highest we’ve seen is 94 cents [on the dollar],” Feuerstein said. But sales in the low-80-cents range are also happening, and some sellers may even go into the 70s. “The pricing depends on the size of the credit and the creditworthiness and reputation of the seller, among other things,” he said.

Moon said that for the 2023 tax year, current production tax credits sell in the mid-90s, and ITCs from established solar, wind, and battery storage developers are in the low 90s. Technologies that now have a smaller pool of buyers, such as biogas, are trading around 90 cents or in the high 80s, he said. “Smaller projects, projects from newer developers, or projects with more risk or complexity may have a discount in the mid-80s,” Moon said. Looking forward to 2024, the options will increase with additional technologies, such as carbon capture, and new structures. For example, buyers could lock in a larger discount by committing to purchase tax credits for projects that will be placed into service at least 12 months in the future.

The proposed regulations established that the discount at which credits sell isn’t taxable income to purchasers, which has caused sales prices to rise. Moon noted that from the standpoint of the internal rate of return, the returns on purchases are quite healthy because the credits can be used to offset quarterly estimated payments.

The successful completion of the initial credit sales is likely to serve as a proving ground for the process. Buyers and sellers of smaller credits in particular may be the beneficiaries of the collective knowledge and eventually more standardized processes that follow on the heels of the initial transactions. “It’s harder to justify the transactional expense necessary for a smaller transaction,” Rubio said. He said that he hasn’t seen a completed sale of a credit under $5 million so far, but that is likely to change as the market develops.

‍

At Reunion, we believe that setting a strong company culture from the start is a critical part of building a high-performing company. Our founding team worked together to define company values that influence our everyday work; from how we screen and hire new employees, to how we collaborate and develop our product offering.

Our mission has remained constant. Our team members are motivated by our mission to make a meaningful difference in the fight against climate change. We believe that our team is uniquely positioned to increase deployment of renewable energy through our deep experience in financing.

We have five core company values. Every quarter, we re-visit our company values and ask whether these values remain relevant to how we work. This always spurs insightful and honest reflections on where we are succeeding and where we can improve. Sometimes, it leads us to adjust our company values to better reflect what is truly important.

Our mission

Reunion’s mission is to accelerate investment into renewable energy projects by simplifying the project financing process.

Our values

Communicate empathetically and directly

• We communicate openly and directly, even in disagreement
• We are kind and assume our teammates, customers, and partners have the best intentions

How can we go faster?

• We make firm and fast decisions, particularly on decisions that can be reversed
• We ship fast and adjust course based on data and feedback

How can we do it better?

• We run experiments that we can measure and are open to changing our minds when presented with data
• We keep an “enterprise-level” bar for excellence

Everybody is a leader and an owner

• Anybody can own an initiative and make it a reality
• If we commit to a project, we aim to follow through to finish

Continuous growth

• We strive to keep learning and improving, both as a company and as individuals
• Feedback is a gift; we embrace opportunities to grow

Come join us

Defining and refining our company values has helped us clarify who we want to be as a company. We have developed a high-performance culture, and we have surprised ourselves at times with our pace of execution despite having a small (but mighty) team. I should also emphasize that, although it’s not an official company value, we also have fun! 🙂

We believe that hiring and motivating the best people will be core to achieving our climate mission. If our mission and values resonate with you, we are always looking for talented people to join us – check out our open roles.