Frequently asked questions
FAQ
What is a tax credit?
A tax credit is a type of incentive offered by the government to businesses or individuals to encourage certain behaviors or investments. Credits act as a direct reduction in the amount of tax owed, providing a dollar-for-dollar reduction in tax liability (e.g., $100 in tax credits will serve as a $100 reduction in taxes owed). Tax credits can be claimed by meeting specific criteria, such as investing in renewable energy, affordable housing, or other qualifying activities.
What types of renewable investments are eligible for Investment Tax Credits?
Solar, small wind, qualified fuel cell, waste energy, qualified microturbines and biogas, combined heat and power, energy storage and microgrid controllers. We find this cheat sheet on investments eligible from Norton Rose Fullbright useful.
What is a tax credit transfer?
A tax credit transfer refers to the process of transferring or selling tax credits from one entity or individual to another. It allows the original recipient of the tax credit, such as a renewable developer, to sell their earned tax credits to a third-party buyer. The buyer, often an investor or entity with a tax liability, purchases these tax credits at an agreed-upon price. The transfer of tax credits enables the buyer to offset their tax liabilities while providing the original recipient with immediate liquidity or financial value for their tax credits.
Climate tax credit transfers are brand new. Transfers were not possible for climate tax credits (e.g., Section 48 ITCs or Section 45 PTCs) until the enactment of the Inflation Reduction Act in 2022, and have only become permissible in 2023.
Who can transfer or sell renewable energy tax credits?
Any taxpayer who has claimed the tax credits covered by the Inflation Reduction Act is allowed to transfer them, unless they are tax exempt entities eligible for direct payment.
More concretely, the following renewable tax credits are eligible for transfers:
- Investment tax credit (“ITC”) (Code section 48)
- Production tax credit (“PTC”) (Code section 45)
- Technology neutral ITC (Code section 48E) and PTC (Code section 45Y)
- Carbon oxide sequestration credit (Code section 45Q)
- Alternative fuel vehicle refueling property credit (Code section 30C)
- Zero-emission nuclear power production credit (Code section 45U)
- Clean hydrogen production credit (Code section 45V)
- Advanced manufacturing production credit (Code section 45X)
- Clean fuel production credit (Code section 45Z)
- Qualifying advanced energy projects credit (Code section 48C)
Who can buy renewable energy tax credits?
Any US taxpayer (corporation or individual with tax liabilities in the US) can purchase tax credits.
However, while they can purchase tax credits, individuals can only offset passive income taxes, which do not include active income taxes (e.g., from salary) or portfolio income taxes (e.g., from investment in stocks); due to the passive activity loss rules. Passive income may include income from business or trade activities in which the individual does not materially participate or from rental activities, although it can be complex even in these cases. For individuals, closely-held corporations and pass-through partnerships we recommend to consult with a tax professional.
While the IRS may provide an exception to the passive activity loss rules, for the time being individuals should only purchase tax credits when they have passive income tax liabilities.
Why would someone want to buy a tax credit?
Tax credits can provide very attractive return opportunities with limited risk, while also helping to drive renewable development to create a greener planet:
1. Return on investment: Buyers purchase tax credits at a discount and turn a profit. For example, buyer X purchases $10,000 worth of tax credits for $9,200 in cash. The buyer is able to reduce their tax liability by $10,000, having spent only $9,200. This represents a 8.7% (10,000/9,200) upfront return on their investment.
2. Accelerating the energy transition: When you purchase a renewable energy tax credit, your investment dollars help developers execute on projects. In many cases, this financing is the difference between a successful or unsuccessful clean tech project. Your investment contributes directly to more renewable development and a greener planet.
How do tax credit transfers work?
Tax credit transfers require participation from a Seller and a Buyer.
1. Sellers register their renewable energy projects with the IRS to qualify for tax credits and list credits for sale.
2. Buyers purchase tax credits from Sellers at a discount. Sellers can monetize credits immediately, and Buyers can turn a profit on their investment.
3. Sellers (or developers) put their project into service. Renewable projects must satisfy the requirements of the IRA (above) to qualify for credits.
4. Buyers and Sellers complete a transfer election statement with the IRS.
5. Both Buyers and Sellers include the IRS registration number on their tax returns for the year in which the credit applies.
Additional information about tax credit transfers can be found on the IRS guidance FAQs.
Concentro exists to help facilitate these transactions. We streamline this entire process to make it easy for Buyers and Sellers to get the most out of tax credits.