How to overcome the CFO’s resistance to using the possibility of transferring tax credits to green energy

The green energy financing landscape has undergone a significant transformation with the passage of the Inflation Reduction Act (IRA) in August 2022. One of the most innovative features introduced in the IRA is the ability to carry forward tax credits for green energy projects, representing a change in the way we finance and use investments in renewable energy.

Traditionally, tax credits have been a key incentive for developers of green energy projects such as solar and wind power. These loans help offset development costs, making projects more financially viable. Previously, to cash in on these credits, developers partnered with tax equity investors, such as large banks or insurance companies, who could use the credits to reduce their own tax liabilities.

These traditional tax equity investments were generally long-term investments (e.g., six or seven years) and often involved detailed technical accounting considerations.

Expanded participation in the tax relief market

IKE introduces a new, innovative dimension of this system in terms of application portability these loans. This allows developers to sell tax credits directly to a broader group of potential investors, who then purchase these federal tax credits at a discount, using them to lower their overall tax bill. Tax credit developers and sellers benefit from a streamlined transaction compared to traditional tax equity solutions. Depending on the seller profile and eligible project technology, the transaction price of the tax credit can range from 86 to 94 cents on the dollar.

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Traditionally, tax credits have been a key incentive for developers of green energy projects such as solar and wind, and these credits help offset development costs, making projects more profitable.

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On April 30, the United States Internal Revenue Service (IRS) issued final regulations under Art. 6418, which provide detailed rules governing the tax credit transfer process. To sum up, these regulations are consistent with previously issued draft regulations. Although the market for tradability had already developed prior to the issuance of the final regulations, confirmation provides market participants with additional confidence that they will be able to proceed with their contemplated transactions.

Some transferable tax credits include: bonus extrasthat relate to specific policy objectives, such as meeting applicable wage or apprenticeship obligations, sourcing project materials from within the country, or implementing projects in designated energy communities. In the case of investment tax credits, these add-ons can help developers obtain tax credits of up to 50% of eligible costs for qualifying projects.

Demonstrating net tax savings

Despite the obvious benefits, some businesses have been slow to adopt tradable tax credits due to lack of awareness. Some chief financial officers (CFOs) think it sounds too good to be true, and there are some concerns about its link to other abusive tax programs, such as workers’ compensation relief.

However, once CFOs understand the cash flow benefits and no strings attached, their resistance often wanes. To address any concerns, CFOs can work with their tax advisors to determine their companies’ tax liabilities and illustrate the benefits of tradable tax credits for the tax year. When CFOs see the net tax savings on paper, their eyes may open to quite a savings opportunity.

In addition to taking advantage of the carryover option to the current tax year (by offsetting and reducing estimated tax payments), the three-year carryover of certain transferable credits makes it easier to purchase credits to cover the prior year’s tax liabilities as well. However, this strategy must be weighed against the cash flow implications of funds potentially tied up in the IRS refund process.

Corporate tax professionals should consider taking the following actions to help their CFO better understand the benefits:

• • • Model current prior year tax scenarios with and without clean energy IRA tax credits
    • Provide insight into potential net tax savings through estimated tax payment, cash flow and financial modeling showing the benefits of purchasing tax credits
    • Please describe the due diligence procedures that will be undertaken to check and confirm the eligibility and amount of the tax credit
    • Please outline the risk mitigation measures available to purchasers, such as a corporate guarantee and tax insurance typically provided by the transferor
    • Develop talking points to counter any misconceptions that investing in tradable tax credits constitutes tax avoidance or abuse

The transferability of tax credits is helping the energy transition by providing a powerful planning tool for both green energy developers and corporate taxpayers. With the relevant IRA provisions set to remain in place for the foreseeable future, portability is expected to provide a lasting boost to the renewable energy sector while enabling businesses to reduce their tax burden.

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