The recently proposed IRS rules on monetizing renewable energy tax credits offer developers exciting new options to obtain cash value from their projects’ credits. Whether looking to sell credits or receive direct cash payments, understanding the key provisions will enable developers to capitalize on the new opportunities and ITC transferability.
This post summarizes the top 10 insights developers need to know about the proposed rules for tax credit transfers and direct pay. We’ll also explore how 48fund can support developers in navigating the new landscape.
Background on the IRA Renewable Tax Credit Reforms
The clean energy reforms in the Inflation Reduction Act (IRA) passed in 2022 were transformational in expanding and enhancing renewable tax credits [1]. On top of longer credit terms and bonus adders, two pivotal changes allow developers to unlock more value:
- Tax credit transferability – enabling the sale of PTCs or ITCs to third-party buyers
- Direct pay – allowing certain developers to receive cash payments directly from the IRS in lieu of credits
On June 14, 2023, the IRS released long-awaited proposed guidance detailing how these programs will work [2]. The rules provide clarity on issues like transfer mechanics, payment timeframes, recapture liability, and compliance processes.
Let’s explore the top 10 implications stemmming from the IRS proposal that renewable developers need to know.
#1: Transferability Opens New Monetization Pathways
For developers, the ability to sell unused credits unlocks new capital sources and revenue streams. Direct sales to tax equity investors, corporations, PE firms or intermediaries create liquidity [3]. This enhances project economics, especially for developers without sufficient tax appetite to fully utilize credits.
Consider a developer with a $100M wind project earning $40M in ITCs over 5 years. Previously, if they could only use $10M of credits annually, $30M would be lost. Now through transfers, the full $40M credit value can be unlocked.
#2: Direct Pay Provides Upfront Cash Flow
Certain developers can now elect to receive direct cash payments from the IRS instead of credits [3]. This includes tax-exempt entities, co-ops, tribal organizations and public power utilities. For projects like solar or wind, it equals roughly 60-80% of the credit value upfront.
Direct pay removes tax equity requirements, reduces financing costs, and improves IRRs. This makes more projects economically viable.
#3: Credits Can Be Sold Once Per Year
Developers can elect to sell any portion of credits on a per-project, per-year basis [4]. For example, a developer could sell 50% of Year 1 credits from Project A and 25% of credits from Project B.
There is flexibility to scale transfers across the portfolio annually based on capital needs and appetite. Credits can only be sold once – buyers cannot resell them.
#4: Long-Term Agreements Are Allowed
While credits must be paid for when earned annually, binding forward agreements are permitted [5]. For example, a developer could secure a binding commitment from a buyer to purchase 80% of credits from a portfolio of projects over the next 5 years.
Forward agreements provide revenue certainty and guarantee liquidity for developers. Enabling partnerships in advance is advised.
#5: Partnerships Need Special Handling
For projects owned by partnerships, only the partnership can sell credits or elect direct pay [5]. Individual partners cannot make transfers or claim direct cash payments.
However, partners can direct the partnership to sell their share of credits. Distribution of sales proceeds is agreed between partners. Close coordination is required.
#6: Transfer Elections Have Specific Procedures
To sell credits, developers must follow required IRS procedures [6]. A transfer election statement must be filed with tax returns detailing credit amounts sold, buyer information, and payments received. Minimum project documentation must also be provided to buyers.
Strict compliance will be key. Developing institutional capabilities to properly administer transfers will maximize value.
#7: Direct Pay Elections Also Have Specific Steps
Similar to transfers, developers claiming direct pay must follow IRS procedures [6]. Required information on the project and credits must be filed annually through an IRS portal. Registration numbers are issued upon approval.
Solid documentation and coordination with the IRS portal will enable smooth receipt of cash payments.
#8: Buyers Have Recapture Responsibility
If a project is sold or becomes ineligible within 5 years, investment tax credit recapture applies based on a prorated schedule [6]. For transferred credits, the buyer (not developer) bears this recapture liability.
Developers should be aware of recapture exposure if they plan to sell their project interest. Buyers will certainly evaluate this risk.
#9: Payments Follow Strict Timelines
For transferred credits, buyers can pay no earlier than the start of the tax year in which credits were earned and no later than when tax returns are filed [7]. Direct pay follows annual certification procedures.
Developers should account for these nuances in modeling project cash flows and rely on bridge financing strategies as needed.
#10: Passive Loss Rules Apply for Buyers
The passive loss rules limit credit utilization for buyers who don’t actively participate in the renewable energy project [8]. This may constrain the buyer universe primarily to operating companies or C-Corps.
Developers should target corporate off-takers and other compliant buyers with sufficient passive activity to maximize credit pricing.
In summary, while the proposed IRS rules introduce new complexity, they present huge opportunities to monetize credits. Proactive planning considering these key items will allow renewable developers to capitalize.
How 48fund Can Help Developers Navigate the New Paradigm
48fund offers dedicated support helping renewable developers reliably monetize their tax credits at optimal pricing through transfers or direct pay.
Our full-service platform and expertise enables developers to:
- Access a nationwide network of qualified tax equity investors, corporations, intermediaries, and other buyers to facilitate credit transfers
- Obtain specialized tax advisory and transaction support to handle all IRS compliance requirements, filings, and process management
- Accurately forecast future project credits across their portfolio to inform strategic monetization planning
- Model the incremental value creation from transfers or direct pay under multiple scenarios to identify the optimal approach
- Proactively structure partnerships and contracts with buyers to lock in competitive long-term pricing
- Confidently navigate the complexities of transfers or direct pay for partnership-owned projects
- Develop the specialized financial reporting capabilities needed to properly track and document transactions
In short, 48fund empowers developers to unlock the full upside from renewable tax credits under the new IRS rules. Our platform combines trading infrastructure with advisory support and market intelligence to simplify monetization.
Are you ready to start maximizing the value of your credits? Connect with 48fund to discuss your project portfolio and goals. Our team of tax credit experts is ready to help chart your optimal monetization strategy.
Sources:
[4] IRS, “Frequently Asked Questions on Transferability of Clean Energy Tax Credits”, June 2023
[6] IRS, “Frequently Asked Questions on Transferability of Clean Energy Tax Credits”, June 2023
