Solar tax credit transferability: What you should know
The Inflation Reduction Act has expanded opportunities to take advantage of the commercial investment tax credit for solar energy, potentially reducing barriers to the development of large-scale clean energy projects.
In the past, taxpayers were often not allowed to sell federal income tax credits outright which often created a conflict for developers who were not able to use the credits themselves.
To get around the transferability limitations, complex tax structures were created to allow for tax credit investors who would contribute equity to receive an allocation of credits and often depreciation as well. But finding such equity investors can be cumbersome and costly.
Under the new tax law, however, these solar tax credits can now be bought and sold by the developer one time. This change will essentially allow new cash equity into your project while not changing the ownership structure.
The IRS recently released guidance under proposed rules (REG-101610-23) discussing the nuances of transferring renewable energy credits.
What is the tax consequence of transferring the credits?
The tax credits must be exchanged for cash with an unrelated party. The cash received will be treated as tax-exempt income. The cash paid by the buyer is a nondeductible expense. The credits can only be sold once, so it’s important to understand the impacts before arranging a sale.
What should the buyer consider before purchasing tax credits?
Buyers of credits should first ensure they can use the credits prior to purchasing them. After that, they will want to compare the market price of the credit to the cash savings. The market price of the credit is likely going to reflect several variables, including project location, what other deals are pricing and the value of the credits themselves.
For instance, if the market price for solar tax credits is 85 cents and you buy $100,000 of solar tax credits for $85,000, you will have saved $15,000 cash, assuming that this will immediately offset your tax liability.
The buyer will also want to have done their due diligence to ensure the credits they are buying meet the standards required. The IRS-proposed rules stipulate that the buyer will be liable for recapture of any ineligible energy credits. In addition, under the IRA, base credit along with several other multipliers enhance the amount of the credit. It will be important to understand that the purchase meets the criteria of the multipliers before paying for the credit.
What should the seller consider before marketing their credits?
Similar to the buyer, the seller will want to have proper knowledge regarding the amount of eligible credit for their project. Taxpayers who are developing solar projects will want to determine their own ability to use the credits prior to marketing them. Depending on the seller’s experience and size, additional due diligence may be needed to find a buyer willing to accept the sale. This could include additional indemnifications for the credits if they are required to be recaptured or even additional insurance. These are additional costs to the arrangement that may change the economic benefit to the developer.
Can the developer use some of the credits, but not all?
Yes, a partial amount of the tax credits can be sold; however, the portion must be a "vertical slice" of the tax credits and cannot be solely sourced from a bonus/adder credit. This would allow the developer to still get some benefit of the credits to the extent they can use them and sell the rest.
What credits are available to be sold?
- §48 energy investment tax credit
- §45 renewable electricity production credit
- §45Q credit for carbon oxide sequestration
- §45V clean hydrogen production credit
- §45Y clean electricity production credit
- §45U zero-emission nuclear power production credit
- §48E clean electricity investment credit
- §300 alternative fuel vehicle refueling property credit
- §45X advanced manufacturing production credit
- §45Z clean fuel production credit
- §480 advanced energy project credit
How Wipfli can help
Determining how to proceed with the expanded solar tax credits for developers is complex. Wipfli’s team is prepared to help you and your team ensure you are making the best decision for your organization. Wipfli professionals are ready to work with construction firms, developers, architects and engineers to help you make the most of the available federal, state and local energy incentives. You’ll gain confidence that you are making smart tax moves that help your bottom line as well as benefit the environment.
Contact us to learn about our energy strategies and other tax services.
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