With the passing of the Inflation Reduction Act, the tax credits from new clean energy projects are now transferable under the Internal Revenue Code (the “Code”), which means any large company with a tax liability can buy them at a discount through a simple sale transaction and make an attractive return on their investment. Companies can offset as much as 75% of their tax liability and apply credits 3 years back or 20 years forward.

Renewable credits come in two general types. The first is investment tax credits (“ITC’s) that are earned when a project begins operation, and are based on a percentage of the project’s value (which is either based on the cost of constructing the project or on the cost of its acquisition from a developer). Production tax credits (“PTC’s”) provide a fixed dollar value (adjusted for inflation each year) for each actual kWh of renewable energy produced by a facility, usually for each of the first ten years of a project’s operating life. Each type of tax credit is currently limited to a specific list of technologies, although after 2025 any method of producing zero-emissions energy will be eligible for both ITCs and PTCs.

The Inflation Reduction Act also introduced a “laddered” structure to the credits, requiring that larger projects (above one megawatt in nameplate capacity) pay prevailing wages to laborers and mechanics that work on the project, and use a minimum number of apprentice hours in their construction - or face a five-fold reduction in the amount of their credit. In addition, bonus credits have been introduced for using (a) domestic materials, (b) locating projects in certain “energy communities” affected by the energy transition, and (c) locating projects in low-income census tracts or Tribal lands or providing benefits to low-to-moderate income communities.

Today, buyers are primarily focused on proven technologies such as solar, wind, and storage, which had received tax investments before the IRA; however, the IRA has enabled a wide range of technologies (including electric vehicle charging, and carbon capture) to qualify for, and transfer, tax credits, and we anticipate that these technologies will play a significant role in future years. The Ever.green team guides buyers through this process, ensuring they focus on quality deals and undertake a robust diligence process.

Buyers are allowed to realize their benefit as soon as they “intend” to purchase a tax credit by reducing their estimated quarterly tax payments - in other words, potentially before they even pay for the credit.
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If buyers reduce their tax payments before a purchase has been closed, and the tax credit is not in fact earned or purchased (or not earned or purchased in the anticipated tax year), they will need to adjust these payments pursuant to Sections 6664 and 6665 of the Code. In the event a buyer wants to reduce estimated tax payments prior to even entering into a purchase agreement, they should consult with their tax advisors as to how to properly document their intent to purchase.

There are several risks that buyers of investment tax credits face (including opportunity cost if a buyer purchases tax credits in advance for a project never placed into service, and uncertainties given the incomplete status of IRS regulation), but two of the most important (and unique to the purchase of tax credits) are as follows:

Excessive credit transfer risk: The first type of risk is that the amount of tax credit is incorrectly determined and is reduced after IRS audit. This risk is generally dependent on events that have occurred prior to the sale. Such an excessive credit transfer can result from several sources: for example, there are detailed rules on what counts and what does not in the calculation of the investment that the IRS will provide an investment tax credit for, and to what extent “soft costs” such as developer’s fees may be included; failure to comply with these rules can result in a credit reduction. The laddered structure of credits under the Inflation Reduction Act described above also introduces the risks that credits may be reduced due to failure to comply with certain requirements, including, for example, those regarding payment of prevailing wages, usage of apprentices, usage of domestic materials, location of the project within an “energy community” or low-income census tract or Tribal lands, or provision of benefits to low to moderate income persons.

Failure to calculate a tax credit correctly may result in the buyer having to repay the excess to the IRS, if the amount of the tax credit sold exceeds the correct credit amount. In addition, if the buyer did not have reasonable cause to believe in the credit amount determined by the seller, it may face a 20% penalty on top of such repayment.

Recapture risk: The second type of risk is recapture, which is the risk that part of the credit will need to be repaid to the IRS if the project ceases to operate, is sold, or the developer fails to comply with prevailing wage requirements, within the first five years after the credit is earned. This reintroduces some project risk to a tax credit sale - to avoid recapture, the project has to remain in operation, maintain compliance with prevailing wages in any repair or alteration work, and the developer or project owner has to agree not to sell. It may also be harder to diligence this risk prior to a sale since it relates to events that occur after the transaction.

The consequences of recapture are slightly different than excessive credit transfer, and depend on what year the event described above triggering recapture occurs during the five-year window: each year, the amount of credit “recaptured” goes down 20 percent, from 100 percent during the first year following the project’s placement into service to 20 percent during the fifth year.

It should also be noted that individual buyers may face individual risks associated with their own tax or regulatory position - for example, banks may need to consider the effect of their capital requirements, and multinational corporations may need to consider the effect of the Pillar 2 treaty if and when it is adopted by the United States.

Buyers of production tax credits do not face recapture risk, which is unique to the investment tax credit. Perhaps because of this, however, pricing on production tax credit deals is typically higher than investment tax credit deals, impacting the potential savings for a company's tax bill. Furthermore, production tax credits face similar risks as investment tax credits in respect of excessive credit transfer, opportunity costs if the credits are purchased in advance for a never-completed project, incomplete regulation, and, as discussed above, risks particular to a buyer’s specific tax position.

In addition, buyers of production tax credits may face risks from inaccurate projections of a facility’s production, and their own need for tax credits, in each case over a timeframe of up to ten years. This is because production tax credits depend upon the amount of energy actually produced by a facility, which can be uncertain. This is also because credits are only issued on an annual basis following each of the first ten years after a facility is placed into service; sellers are looking for commitment from buyers to commit to purchase as much of this window as possible, but this requires buyers to estimate their tax liability years in advance.

Ever.green mitigates potential opportunity cost by sourcing high-quality projects and creating strategic partnerships to bring businesses of all sizes a marketplace that supports clean energy development through innovative financing and confident access to impactful projects.

We have sought to mitigate regulatory risk by including flexible provisions in our form documentation, in particular with respect to bonus credits, strong indemnification, and staying up-to-date on the latest regulations.

Ever.green mitigates excessive credit transfer risk for marketplace participants through our partnership with Baker Tilly, a top-tier tax advisory firm that has extensive experience with diligence and supporting ITC claims. They can, at the buyer or seller’s request, provide a closing memorandum that verifies the eligibility and authenticity of the tax credits being sold and consists of a cost-segregation analysis. We also work with third party advisors to the transaction and ensure a strong, robust, diligence process through our platform for all parties. Ever.green mitigates both excessive credit transfer and recapture risk by working with high-quality developers who typically look to own/operate projects, and will stand behind their credits and indemnification of buyers. Insurance provided by the project developer is also available to cover these risks.

Now that tax credits are transferable, companies of all sizes can buy credits directly through a simple bi-lateral sale contract. Ever.green facilitates and creates a simple purchase agreement between developers (sellers) and companies (buyers) to transfer tax credits. No project ownership is required on the part of buyers.
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At a high level, here is what you can expect as a buyer. Ever.green manages a matching process (i.e., bid/auction) between sellers and prospective buyers. Due diligence is conducted, and a purchase agreement is signed along with other sale documents. After the seller completes the renewable energy project construction, the transaction is closed and key items like ITC amount & system completion are validated. The funds are transferred, and the appropriate documents are filed with the IRS.

These credits are not refundable, so any individual buyer is limited by their “tax appetite,” an amount of taxes the buyer would otherwise pay that can be reduced by the tax credit. Your tax appetite varies depending on what  type of entity you are.
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Widely-held corporations (where more than 5 people own more than 50% of the company) are able to offset up to 75% of their federal tax liability. Individuals, family offices, and closely held private companies that, in each case, have passive income are able to offset all taxes related to such passive income (to the extent the offset does not exceed 75% of their federal tax liability). Corporations with significant multinational operations may also have to consider whether their ability to reduce their taxes is further limited by the base erosion anti-abuse tax (BEAT) and Pillar 2.

You should consult your tax advisor to determine if you have passive income. “Passive income” is defined under Section 469 of the Code and generally includes all operating income from a business in which a taxpayer does not materially participate (e.g. rental income for non-real estate professionals, or income received from limited partnership interests). The concept is subject to many exceptions and complexities, however. For example, portfolio income (dividends, interest, stock/bond gains, royalties) are generally not passive, even if the taxpayer does not materially participate in the underlying business.

The Inflation Reduction Act and Treasury regulations limits the form of consideration for transferable tax credits to cash and cash only.  Specifically, payment must be made in the form of cash, check, cashier’s check, money order, wire transfer, automated clearing house (ACH) transfer, or other bank transfer of immediately available funds.

Furthermore, the cash must be delivered no earlier than the first day of the tax credit seller’s tax year during which the transferred credit is earned, and no later than the due date for completing a transfer election statement with the IRS.  This due date is the earlier of (i) the day the seller has filed its tax return for their tax year in which the credit is earned or (ii) the day the buyer has filed its tax return for the tax year in which the credit is taken into account. Cash payments made inside this window will not be included in a seller’s income for tax purposes; but payments outside this window will likely be treated as ordinary income to the seller, severely reducing the benefit of selling the credit. However, a buyer and seller can commit to purchase a tax credit earlier than this time window, so long as the actual transfer of cash in exchange for the credit takes place within the time window.

For example:

• Assume that a seller of a PTC tax credit sells to a buyer, and the tax years of both end on December 31. The buyer files their tax return for 2023 on April 15, 2024 but the seller files for an extension and does not file their tax return until October 15, 2024.
  
• If the seller of the tax credit earns the credit in 2023, the transfer election statement for the transfer must be filed with its tax return on April 15, 2024.  
• In this case, any cash consideration must be paid by the buyer to the seller between January 1, 2023 and April 15, 2024.  However, buyer and seller can have agreed to purchase and sell the tax credit in advance of January 1, 2023, so long as no cash or other consideration changed hands prior to that date (or after April 15, 2024). 

Yes, an election to transfer a credit must be made no later than the due date of the seller’s tax return for the year in which they earn the credit that they are transferring.  For individuals and corporations who have a tax year ending on December 31, this will be April 15 of the following year (with an automatic six-month extension to October 15), and for partnerships and S-corporations with the same tax year, this will be March 15 of the following year (with an automatic six-month extension to September 15).

The cash consideration rules outlined above also make it difficult to transfer a credit after either the buyer’s or seller’s tax return have been filed.

The IRS has announced the completion of phase one of the release of Inflation Reduction Act regulations, covering release of initial guidance on most important topics. The IRS has also released a major revision of its existing guidance on the investment tax credit, reflecting both new issues raised by the Inflation Reduction Act and longstanding issues needing clarification.

However, some of the existing guidance has raised important questions that will likely prompt follow-up guidance, and final regulations are still required for the tech-neutral production and investment tax credits coming into effect at the beginning of 2025.

Ever.green is a clean energy tax credit marketplace that empowers businesses of all sizes to participate in the energy transition, meet their sustainability goals, and make a financial return. Through Ever.green, companies can purchase tax credits at a discount and commit to forward contracts for high-impact Renewable Energy Certificates (RECs) that help stand up new clean energy projects. Ever.green's marketplace includes streamlined transaction support, standard documentation, due diligence, filing, and compliance monitoring services to reduce risks and maximize efficiency for all parties. Ever.green is a marketplace for accelerating the transition to renewable energy.

We are a team of energy, regulatory, and product experts dedicated to opening up investing in renewables to everyone and accelerating our path to net-zero emissions. We are bringing new capital to the table and funding the creation of new renewable energy and storage projects.

We have seen deals challenged by misaligned expectations, and have found that a key to success in this early market is a highly curated process, where we work with both the buy side and sell side to close deals. What you get from Ever.green is a hands-on, dedicated team, legal documents to support transactions, and an ecosystem of 3rd party partners to support any diligence and filing needs.