How PE Firms Can Take Advantage of Credit Transferability Under the IRA
Tax credit transferability under the Inflation Reduction Act (IRA) has changed the landscape for monetizing federal clean energy tax credits.
Historically, extracting credits from a renewable energy developer required a long-term investment through nuanced ownership structures referred to as tax equity investments.
The IRA creates an attractive alternative to these investments by allowing credits to be directly transferred, creating a new credit marketplace for private equity portfolio companies and blocker corporations seeking tax savings.
Transferability under the IRA
The IRA permits tax credit transfers of several green energy tax credits. Any “eligible taxpayer” may transact, which generally includes for-profit corporations, partnerships, individuals, and trusts. While the landscape is still evolving, the marketplace facilitates purchasing discounted credits with a shortened investment period and streamlined process as compared to traditional tax equity investments.
The tax credit purchase price can vary based on the seller’s creditworthiness, project size, credit type and amount, and existence of tax insurance. Credit purchases must be made in cash by an unrelated party and can only be sold once. The credit is transferred via a legal purchase and sale agreement and a transfer election statement is attached to the seller’s and purchaser’s tax returns for the applicable tax year.
Generally, a tax credit transfer transaction ranges between $.88 – $.93 cents per $1 of tax credit. With proper planning, the discount earned (which is tax-free) can create significant cash flow opportunities on current year estimated tax payments. In addition, a three-year carryback allowance for transferable credits creates opportunities to go back and cover previous tax liabilities. However, it should be weighed with the cash flow implications of funds potentially tied up in the IRS refund process.
Which strategy to pursue
The market is expected to remain robust for both conventional tax equity investments and tax credit transferability transactions. Some green energy developers are likely to keep seeking traditional tax equity investments to use tax depreciation benefits, which are absent in tax credit transfer scenarios. In addition, tax equity investors are exploring strategies to engage in traditional tax equity frameworks while also considering separate transactions to transfer credits.
As private equity companies analyze potential tax credit investments, they should implement thorough due diligence and investigate tax insurance to reduce risks. The relatively simpler process of tax credit transferability is drawing a significant number of new investors to the field. Ultimately, each investor (and developer) will assess their specific circumstances to decide whether to opt for tax equity, credit transferability, or a combination of both strategies.
How we can help
CLA’s energy services team can help you evaluate strategies to meet your clean energy and tax-saving objectives. From cash flow modeling to tax credit monetization, our team advises on end-to-end planning for renewable energy project investors and developers.
Written by Brandon Hill
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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