Cashing in on Inflation Reduction Act Tax Credits
Earlier this week, we laid out how the Inflation Reduction Act (IRA) can provide many tax benefits and financing opportunities.
One of the game changers in the IRA was the ability for green energy project developers to sell their tax credits to other taxpayers. This was done to help spur economic development as the government found developers couldn’t always use these tax credits, thus previous legislation wasn’t driving enough desired activity. Through the IRA, green energy developers can now monetize these tax credits through selling them to taxpayers.
The opportunity for taxpayers is having the ability to purchase tax credits from anywhere from 88 to 95 cents on the dollar. Like most tax laws, there are certainly some nuances, but in general, taxpayers can purchase these credits to offset their tax liability. The difference in the tax credit (tax savings) and the cash paid for the credit results in positive cash flow and is tax-free.
How to monetize Inflation Reduction Act tax credits
As an example, if a C corporation taxpayer had a $1 million tax liability, they could purchase a $500,000 tax credit for 90 cents on the dollar for $450,000. They would be able to recognize $50,000 of positive cash flow tax-free.
Corporate taxpayers are the ones most likely to benefit from these tax credit transfers. Flow-through businesses (S corporations and partnerships) as well as individuals have some additional hurdles to fully use the credits. If this an opportunity you’d be interested in exploring, we recommend you reach out to your CPA to understand if it might make sense for you.
Our team is also hosting a webinar March 7 explaining options for monetizing the IRA’s clean energy credits. Learn more about the webinar and sign up here.
We’ve also published two articles detailing some of the act’s benefit options:
- Inflation Reduction Act Credit Monetization Programs Take Shape
- What Does IRA Credit Transferability Mean for Tax Equity?
How we can help
CLA’s energy tax services team can help your organization navigate the IRA and capture available benefits. Contact us for more information.
Andy is a CPA and trusted advisor with 15 years of experience providing tax, accounting, assurance, and consulting services to transportation industry owners and operators. He is a tax principal with CLA in the Minneapolis, MN office. He also consults with high net worth individuals and owners of closely-held transportation businesses on all aspects of tax planning, estate planning, and retirement planning. Andy is also the tax leader for transportation industry across CLA.
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