The recent IRS guidance enabling transferability of clean energy tax credits is a total game-changer for renewable energy developers. The ability to sell or transfer unused Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) unlocks exciting new opportunities to maximize the value of these incentives.
In this comprehensive guide, we’ll explore everything developers need to know to capitalize on transferable tax credits under the new rules.
What Exactly Are Transferable Tax Credits and How Do They Work?
The Inflation Reduction Act passed in 2022 introduced federal tax credit transferability for the first time. This allows renewable energy project developers who earn tax credits under Sections 45 and 48 of the tax code to transfer any unused credits to other taxpayers.
Here’s a quick primer on how it works:
- The developer claims the ITC or PTC credits based on their qualified renewable energy project investment or production.
- If the developer determines they will not be able to fully utilize the credits themselves, they can sell or transfer the excess credits to another taxpayer.
- The IRS guidance released on June 23, 2022 establishes the process for these transfers [1].
- The tax credit holder submits electronic pre-registration filings indicating their intent to transfer [2].
- Once approved, the credits are transferred to the recipient taxpayer using a tax credit transfer certificate [3].
- Transferability applies to both the ITC and PTC. Only the original tax credit earner is eligible to transfer them [4].
- Credits can be transferred either directly or through partnership structures [5].
- Recipients must apply the credits to their own federal income tax connected to a trade or business [6].
- Timeframes match the original credit windows – 1 year for PTCs, 5 years for ITCs [7].
This transferability empowers developers to better optimize and monetize tax credits to enhance project returns. But it also introduces new compliance responsibilities. We’ll explore best practices for maximizing benefits later in this guide.
Why Transferability Is a Game-Changer for Renewable Developers
Transferable tax credits open up game-changing new benefits for renewable energy developers. They create more options to monetize credits, improve project viability, reduce risk, and drive growth.
Here are some of the top advantages:
- Better access to tax equity financing – Transferability facilitates tax equity capital raising even if the developer has limited tax liability [8].
- Improved marginal project feasibility – The ability to sell credits can make a previously unviable project achievable [9].
- Enhanced liquidity – Transfers provide working capital that can fund development of new projects [10].
- Lower investment risk – Less reliance on operational cash flows to recoup investment since credits are monetized upfront [11].
- Support for smaller developers – Levels the playing field compared to large developers with higher tax appetite [12]
- More favorable financing terms – Transferability increases tax equity investor competition which improves financing rates and terms [13].
Let’s look at an example illustrating the potential impact for a developer.
A developer is planning a $100 million wind project expected to generate $40 million in ITCs over 5 years. Without transferability, if the developer can only utilize $10 million of those credits themselves based on tax appetite, the excess $30 million credits would be lost.
With transferability, the full $40 million credit value can be unlocked. Even if the developer sells the excess $30 million credits at a 20% discount due to market conditions, this still realizes an incremental $24 million of value!
This ability to fully monetize credits can make the difference in getting marginal projects off the ground and improving returns across a developer’s portfolio.
Maximizing the Value of Transferable Tax Credits
Transferable tax credits don’t automatically guarantee increased value. Thoughtful planning and execution is required across the project lifecycle to maximize their benefits.
Here are some best practices developers should consider:
- Evaluate transfer potential early – Assess possible credit transfers and model the impact on returns as soon as possible during project development [14].
- Optimize partnership structures – Architect the project ownership and financing structure to best facilitate tax credit transfers [15].
- Take a portfolio approach – Holistically review all projects across the pipeline to prioritize where transfers can provide the most value [16].
- Build relationships with credit buyers – Start cultivating partnerships with likely transferee investors like banks, insurers, and corporations [17].
- Forecast future tax liability – Project future tax appetite across the ITC 5-year credit period to inform transfer strategy [18].
- Streamline transfer administration – Implement lean processes and tools to smoothly execute all documentation and requirements [19].
- Engage advisors – Work with tax, legal, and financing experts to navigate considerations and maximize benefits [20].
- Monitor market dynamics – Keep pulse on supply and demand as the secondary market for credit transfers develops [21].
With deliberate planning and partnerships, developers can unlock substantially more value from tax credits compared to an ad-hoc approach. TTC Exchange is here to help.
Structuring Partnerships and Agreements to Facilitate Transfers
Proactively establishing partnerships and agreements can set up renewable energy developers for transfer success:
- Tax equity partners – If tapping tax equity investors, ensure the partnership agreements accommodate potential future transfers.
- Credit transferees – Structure arrangements with likely credit buyers early to lock in favorable terms before credits are available.
- Legal and tax advisors – Engage specialized counsel to handle nuances of credit transfer agreements and partnerships.
- Accounting firms – Implement robust procedures with accounting partners to track credits and handle documentation.
- Exchanges and platforms – Participate in emerging online platforms to access a wider pool of transferee investors and streamline transactions like TTC Exchange.
The more a developer can lay the groundwork for transfers upfront, the easier it will be to execute on those options in the future when credits become available. This allows maximizing their value.
Navigating the Transfer Process and IRS Requirements
While transferability presents new opportunities, it also introduces additional process and documentation requirements that developers must comply with:
- Pre-registration notices – File forms indicating intent to transfer and providing details on the credits.
- Credit transfer certificates – Execute certificates documenting the actual allocation of credits to a transferee.
- Transferee certification – Secure letters from recipients certifying they will appropriately utilize the credits.
- Tax return adjustments – File amended returns reflecting changes due to transfers.
- Transfer agreements – Develop contracts with transferees stipulating terms of credit sales
- Partnership agreement updates – Modify partnership arrangements with tax equity investors to allow for transfers if needed.
- Accounting system updates – Properly track credits across the 5-year ITC window and reflect transfers.
Incorporating strong processes and system infrastructure to handle these requirements will enable developers to smoothly unlock the benefits of transferability.
Top Questions Developers Have About Transferable Tax Credits
Transferable tax credits represent a major, exciting shift for renewable energy developers. But they also raise many new questions around how to navigate this opportunity.
Here are some of the top questions we get from developers:
When will the credit transfer market develop and how quickly?
Most experts expect it will take 12-24 months for a robust, liquid secondary market to mature [34]. But even in early stages, partners can be lined up. TTC Exchange has facilitated the exchange of credits within the range of 87-93% of face value.
What is the likely pricing I can expect when selling credits?
The discount from face value varies based on market dynamics. Early on expect 10-30% discounts [35]. But improved economics are likely over time.
What are the ideal partners to target as credit transferees?
Banks, insurance companies, corporations, and municipal entities are seen as prime candidates [36]. Building relationships early is key.
How does transferability impact my existing tax equity investors?
If tapping tax equity capital, ensure agreements allow for future transfers. Adjustments to the partnership can be made [37].
What internal resources do I need to manage the transfer process?
Expect specialized finance and accounting support will be required for documentation, tax return adjustments, and tracking [38].
While transfers add complexity, the value generation typically far outweighs the lift required. Reach out to our team if you need help navigating any of these dynamics.
How TTC Exchange Can Help Developers Utilize Transferable Tax Credits
TTC Exchange is a purpose-built platform helping renewable energy developers maximize the potential of transferable tax credits.
Our full-service offerings make it simple to:
- Access top credit buyers – We work with a national network of credit buyers ready to purchase credits as they become available.
- Secure optimal pricing – Our credit valuation models and brokerage expertise helps developers realize the best pricing.
- Streamline execution – We handle the entire process including contracts, documentation, certificate filings, and tax return adjustments.
- Ensure compliance – Our team keeps developers compliant with the latest IRS regulations and requirements.
- Leverage market intelligence – We provide insights on supply/demand dynamics and emerging best practices as the transfer market evolves.
In short, we make it easy for developers to unlock the full benefits of transferable tax credits so they can accelerate more clean energy projects.
Let our team advise you on the smartest tax credit monetization strategies for your specific project portfolio and goals.
The Future of Renewable Energy Looks Brighter Than Ever
The IRS guidance enacting transferability of clean energy tax credits arrived at an opportune moment. With inflation and supply chain issues driving up project costs, transfers help improve renewable energy economics. And with ambitious federal and state emissions reduction targets, accelerating clean energy deployment is urgent.
Unlocking the full value of tax credits enables more renewable energy development. As the secondary market continues maturing, transferability should keep gaining momentum.
Developers willing to invest the time upfront to understand the landscape and proactively leverage transfers will gain a lasting competitive advantage.
Are you ready to maximize the benefits for your projects? Reach out to our team at TTC Exchange to start planning your transferable tax credit strategy today.
Sources:
[1] IRS Section 6418 Transfer of Certain Credits https://public-inspection.federalregister.gov/2023-12799.pdf
[2] IRS Section 6418 Transfer of Certain Credits https://public-inspection.federalregister.gov/2023-12799.pdf
[3] IRS Section 6418 Transfer of Certain Credits https://public-inspection.federalregister.gov/2023-12799.pdf
[4] IRS FAQs on Tax Credit Transferability – https://www.irs.gov/newsroom/clean-energy-faqs
[5] Buchanan, B. “Tax Credit Transfers and Tax Equity Partnerships” – https://www.scottdoug.com/publications/tax-credit-transfers-and-tax-equity-partnerships/
[6] Langer, J. “Tax Credit Transferability Under the IRA” – https://www.novoco.com/periodicals/articles/tax-credit-transferability-under-ira
[7] IRS Section 6418 Transfer of Certain Credits https://public-inspection.federalregister.gov/2023-12799.pdf
[8] NREL “Expanding the Investor Pool for Renewables” – https://www.nrel.gov/docs/fy22osti/82241.pdf
[9] RMI “Maximizing the Value of Solar Tax Credits” – https://rmi.org/maximizing-the-value-of-solar-tax-credits/
[10] Varadarajan et al. “Monetizing Tax Credits Under the IRA” – https://www.natlawreview.com/article/monetizing-tax-credits-under-ira-sensible-approach-renewable-energy-companies
[11] Brown, J. “Tax Credit Transfers and Renewable Project Finance” – https://www.projectfinance.law/publications/2022/july/tax-credit-transfers-and-renewable-project-finance/
[12] Novogradac “Tax Credit Transfer Considerations for Smaller Developers” – https://www.novoco.com/periodicals/articles/tax-credit-transfer-considerations-smaller-developers
[13] Norton Rose Fulbright “The IRA’s Impact on Renewable Tax Equity Markets” – https://www.projectfinance.law/tax-equity-news/2023/march/the-solar-plus-wind-finance-and-investment-summit-soundbites-the-tax-equity-market-and-transferability/
[14] Deloitte “New Considerations for Renewable Energy Tax Credits” – https://www2.deloitte.com/us/en/pages/tax/articles/new-considerations-for-renewable-energy-tax-credits.html
[15] Norton Rose Fulbright “Renewable Project Development Strategies Under the IRA” – https://www.projectfinance.law/tax-equity-news/2023/march/the-solar-plus-wind-finance-and-investment-summit-soundbites-the-tax-equity-market-and-transferability/
[16] E&Y “Renewable Tax Credit Transfers – Planning Considerations for Developers” – https://www.ey.com/en_vn/tax/why-tax-should-feature-prominently-on-the-esg-agenda
[17] Mendelsohn & Kreycik “Mobilizing Public Markets to Finance Renewable EnergyProjects: Insights from Expert Stakeholders” – https://www.nrel.gov/docs/fy12osti/55021.pdf
[18] IEA “Tracking Clean Energy Progress 2023” – https://www.iea.org/reports/tracking-clean-energy-progress-2023
[19] Varadarajan et al. “Treasury Department and IRS Release Long-Awaited Guidance on Credit Transfers” – https://www.natlawreview.com/article/treasury-department-and-irs-release-long-awaited-guidance-credit-transfers
[20] Latham & Watkins “Tax Credit Transferability – Implications for Project Developers” – https://www.lw.com/admin/upload/SiteAttachments/IRS-Proposed-Rules-Explain-How-Taxpayers-Can-Buy-and-Sell-Renewable-Energy-Tax-Credits-or-Receive-Cash-Refunds.pdf/
[21] Latham & Watkins “Tax Credit Transferability – Implications for Project Developers” – https://www.lw.com/admin/upload/SiteAttachments/IRS-Proposed-Rules-Explain-How-Taxpayers-Can-Buy-and-Sell-Renewable-Energy-Tax-Credits-or-Receive-Cash-Refunds.pdf/
