CLA’s advice for tax credit buyers in 2025

As tax credit buyers begin to plan their 2025 strategies, one question keeps coming up: how will policy changes affect the transferable tax credit market? Crux’s 2024 Transferable Tax Credit Market Intelligence Report finds that bidding has remained robust following the election in November 2024, indicating a high degree of confidence in the market. However, buyers understandably want to mitigate risk as much as possible.

Brandon Hill, tax principal and leader of CLA’s Energy Tax Services, helps organizations navigate the transferable tax credit market. He joined Crux to discuss how CLA is advising tax credit buyers in 2025.

Crux: What have you been hearing from tax credit buyers about approaching this year, particularly under a new administration?

Brandon Hill: When we're talking to a lot of our buyers, the question “Is there any risk that I could buy a credit and then that credit will be unusable?” comes up. I think the good news is that we have a lot of buyers looking at 2024 transactions even though we're into 2025. The way those rules work, the seller has to sell the credit by the extended due date on an original return. So even if they place a project in service in 2024, they can still have until September 15, 2025, to sell it if they’re a partnership or October 15, 2025, if they’re a C-corporation, assuming that they're a calendar-year corporation. 

For 2024 credits and the underlying assets already placed in service, I think most folks feel pretty comfortable that those transactions are going to be pretty safe. We also have many buyers interested in 2025 credits to offset their 2025 estimated payments. While buyers might have some concerns about retroactive law changes or just law changes in general, generally the sooner you move, the safer you are. That’s the way our clients are looking at it. The ones who are educated and ready to move want to capitalize on it now, just in case something does change and transferability is not available down the road. Obviously there's a lot of hope that transferability is going to be around, regardless of potential changes related to the Inflation Reduction Act. But most of our buyers see it as an incentive to move faster if they were just thinking about it but not ready to move. 

Crux: You mentioned that educated buyers want to capitalize on tax credit purchases now. What is the range of education that you see among buyers, and how do you support those who maybe aren’t as educated or experienced? 

BH: Historically, the tax equity market was relatively limited. It was a lot of large banks, insurance companies, and other Fortune 500-type companies. What we see with the transferability market is that for a lot of companies — maybe “smaller” companies that had smaller tax liabilities, where the concept of being a tax equity investor might have been very intimidating because of the investment period being six or seven years or the the challenging accounting considerations — the concept of buying a tax credit is a much easier concept to digest. Consequently, we had a lot of new entrants into the market to utilize tax credit purchases as a tax-planning strategy. 

Part of CLA’s role for our clients is to educate them. The number-one question that I get from CFOs is, “This sounds too good to be true — what's the catch?” And I say, “Well, with proper due diligence, knowing who the developer is, having the right parties, like CLA and Crux, it's not too good to be true. There are tax savings to be had.” We educate them about the process, what it entails, what the Internal Revenue Service (IRS) portal registration is. Once you go through that talk about tax insurance, a lot of folks, for a lot of good reasons, think that purchasing a credit could make a lot of sense. And I think for a lot of folks, too, after they've done their first transaction, they really view it as an annual tax-planning strategy. So again, with potential changes on the horizon, I think it is spurning more action, not less action.

Crux: It does. As you’ve alluded to a couple times, there’s a great deal of noise right now about potential changes in law. How does CLA think about separating signal from noise? What indicators are you paying attention to?

BH: We have a lot of great resources and a number of smart people at our disposal. We have a national tax office that has a pulse on specific energy legislation and the legislative process in general. They keep us updated, and then we try to update our clients accordingly. As you know, over the last several weeks, there's been a lot of action, and we're getting a ton of questions from clients. We're just trying to provide great service. 

At the same time, when there's uncertainty, you don't want to tell folks answers that may change in the future. So we do need to be careful what we communicate. Our Tax Policy Watch collects the most up-to-date information on current tax policies.

Crux: As noted in our 2024 Market Intelligence Report, Crux has not seen a slowdown in bids since the election in November. In the period following the election through the end of 2024, approximately 80% of bids submitted on Crux were for 2025 or 2026 tax credits, representing a high degree of confidence among buyers and their advisors regarding the durability of the market. How does that align with or differ from what you've been seeing and hearing?

BH: We had a flurry of activity at year end, in particular. We had a lot of 2024 deals that closed prior to December 31, and things have not slowed down at all. If anything, I think things have actually ticked up again. I think buyers realize that this is a viable tax-planning strategy, and I think a lot of CFOs and tax directors and controllers are saying, “Hey, if this is going to change, let's try to take advantage of it while it's still here.” So we’re seeing more demand, not less demand.

Crux: Are there particular technology types or types of credits that seem more attractive to tax credit buyers? 

BH: Not necessarily. We do have some buyers that are pretty particular about what type of technology or maybe area of the country they want a project to relate to. But in general, a lot of our purchasers are relatively technology agnostic. If it meets their pricing parameters and there's tax insurance provided by the seller, for example, they're relatively technology agnostic so as long as they know that there's proper due diligence.

Crux: What advice does CLA give to tax credit buyers thinking about credits for 2025 and beyond?

BH: There are still a lot of folks moving forward with 2025 transactions. In general, retroactive tax law changes are very rare, and there are certain safe harbors, such as begin-construction dates and when an asset is actually placed in service, that will make it more likely that a credit is still viable and, in this instance, still transferable. To the extent that a project currently qualifies for a tax credit and it's already placed in service, I think it would seem pretty unlikely that there would be some sort of retroactive change that would peel that back. 

So if buyers in 2025 are purchasing credits related to projects that are already placed in service, for example, to offset their Q1 estimated payments, those feel like relatively safe credits. 

We have also seen a little bit of a shift in both tax credit transfer agreements and tax insurance. There are often change-in-law provisions in both those documents. Maybe in 2023 and early in 2024, those provisions weren't very controversial. Now we are seeing both buyer and seller negotiate those change-in-law provisions a little bit more heavily. From a tax insurance perspective, we're seeing some policies that have some additional or different language regarding that change in law. I think from a deal perspective, there are more people paying attention to potential changes in tax law than maybe there were six months ago. 

Crux: Are there certain elements that buyers should look to make sure are included in those provisions?

BH: The biggest question is, ultimately, if there is a change in tax law, who's going to be on the hook? For example, if a credit were to be reduced or completely eliminated due to some sort of unexpected change-in-law provision, most buyers are going to be looking for the seller and/or the tax insurance to make them whole based on that change. Again, retroactive law changes would be pretty rare, but as a buy-side advisor, we want to make sure that our buyers are protected to the full extent possible. 

Look at that contractual language and potentially that tax insurance policy to make sure that, if there is an unexpected change, you can potentially get indemnification, either contractually or via the tax insurance policy. If that's the case, I think most buyers are then relatively comfortable moving forward, even in this environment with some uncertainty, because there are those protections in place. I think most reasonable sellers are open to those discussions and negotiating on those terms as opposed to not doing a deal at all.

Crux: Is there anything about anything else about the diligence process that has changed or that you recommend paying closer attention to?

BH: Nothing specifically related to legislation other than tax law changing. However, there are some new credits effective for 2025 — section 48 and section 45 are transitioning to section 48E and section 45Y, and then 45Z is another credit that's potentially coming on the market. As we start transacting those credits for the first time, it will be interesting to see how that market develops. For a lot of projects, if you began construction before January 1, 2025, they're still going to be grandfathered in under those old rules, so it will probably be a while until we actually transact on one of those “new” credits. But that is something that a lot of our developers are thinking about.

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Crux: How should buyers think about the new tech-neutral tax credit regime?

BH: Yeah. In general, for wind and solar companies and technologies that are very clearly tech neutral, it's going to be a lot of the same diligence process. There are going to be certain projects that were eligible under the old section 48 that aren't going to be eligible under new section 48E because they're not going to be tech neutral. We will see some of the technologies fall off, and we won't see as many deals around those. For example, a lot of the combined heat and power deals will likely not qualify under 48E. The total available inventory might go down once we fully transition to 48E and 45Y, but it's not going to have an immediate impact. It will probably be more of a late 2025 or 2026 impact. 

Crux: It’s a good reminder, too, that there are many factors at play that could affect supply.

BH: Correct. We are getting a lot of questions from developers who are a little bit nervous to start projects that may not qualify for a tax credit. Unfortunately, it's a little bit of a chicken-and-egg situation where, for many projects, the main incentive to make the project economically viable is the tax credit. The best way to ensure you qualify for tax credit is to begin construction and place it in service, but developers and manufacturers don't want to do that if they’re not going to qualify for the tax credit. We appreciate the dilemma that some of the developers are in, especially when there's no crystal ball about if and when changes may take effect. 

Crux: Can you expand more on your earlier about timing for transferable tax credit transactions?

BH: It goes back to the principle of retroactive tax law change being rare. To the extent that you have an underlying asset placed in service, it was eligible for the credit, and then you transacted on the credit, it seems like a pretty low risk that that transaction would be clawed back. So for anything that's going to be a 2024 credit, the underlying assets can already be placed in service. For buyers who are nervous, I think they are incentivized to go ahead and transact on that and take that benefit. For 2025 credits, it's a very similar process. When companies are looking to buy 2025 credits now, they're looking to offset their current-year tax. A calendar taxpayer might be looking at a credit around either April 15 or June 15 or September 15 or December 15. We're seeing folks very interested in entering into term sheets now and then, to the extent the assets can be placed in service in April or June or whenever the buyers’ timeline is, they're willing to transact to offset those estimated payments. Again, I think the general premise is that the probability of a retroactive tax law change for an asset that's qualified under current law and already placed in service would be pretty remote.

Crux: We’ve seen buyers look to the forward market to make their bids more attractive to developers and manufacturers. That might feel riskier to buyers right now given the current uncertainty, so what can they do to make their bids more competitive?

BH: That is a great point, and I think we did see that a lot in the market. When there are multiple bids on a project, we often see the seller request, “Hey, take our 2024 credits, but then also take our 2025 portfolio, as well.” Sometimes that structure is more of a right of first refusal, but oftentimes it's more of an obligation. Sometimes our buyers said, “Nope, it's not worth it. We don't want to do that.” Other times, they're happy to do that, especially if they get a price concession on those subsequent credits. 

Obviously, every deal is different and every buyer is different, but I do think there's a little bit more inherent risk to that. So maybe the approach will be more right of first refusal, but it's not a legal obligation to purchase that 2025 portfolio. We still have buyers willing to do that, though. Everyone's risk profile is a little bit different, but I still anticipate seeing those transactions in the market. It’s really dependent on the buyer, and that’s where my earlier points about insurance and indemnification really come into play.

Crux: Is there anything that we haven't touched on that you think is important for buyers to know as they plan their 2025 tax credit strategies?

BH: Obviously there is a lot of uncertainty with legislation out there, but, as of now, this is still a viable tax planning strategy. We have a lot of buyers moving to the market, as Crux knows — you’re seeing tons of bids every day. If there's hesitation, I think there is, like we talked about, true incentive to move now rather than later. Hopefully later in the year we'll have more concrete guidance about what may change in the Inflation Reduction Act. 

I think a very plausible scenario — and again, this is pure speculation — is maybe the breadth of available credits shrinks a little bit, but hopefully transferability remains. And then I think the key question will be, if the available inventory or amount of credits is decreased, what is that going to do from a market perspective in terms of pricing and risk terms in the contract? 

It's going to be an exciting year, but we still have a lot of motivated buyers looking to do deals. I think folks are just monitoring it closely, as is CLA. For any companies that want to explore purchasing credits as a viable tax strategy but have questions about the process or about legislation, CLA is here to help.