Crux and Greenberg Traurig hosted expert panelists from CLA, Evercore, and Boundary Stone Partners to discuss the final transferability guidance on April 29. Access the webinar recording through GT's website.

The market for clean energy tax credits is taking off. In our 2023 Market Intelligence Report, Crux estimated that the market for 2023 tax credits could top $7 billion, and reach as much as $9 billion. Over the first few months of 2024, we have continued to see significant interest from companies looking to buy clean energy tax credits. So far this year, non-binding bids from buyers and their advisors on Crux have reached nearly $2 billion.

Now, that market is ready to take another step forward. Today, the Internal Revenue Service (IRS) finalized regulatory guidance for tax credit transferability. It cements transferability as a durable tool for clean energy project developers and manufacturers to efficiently monetize their tax credits and for corporate taxpayers to manage their tax liabilities.

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Tax credit sellers with projects of all sizes and technologies have already made significant use of transferability to finance their projects. More than 80% of the transactions we’ve observed in our analysis of the market since 2023 have been under $50 million in notional deal value, illustrating a robust market for projects that may not have historically been able to access tax equity. 

Many prospective tax credit buyers — chiefly US companies with large federal tax liabilities — have been monitoring the formation of this market alongside their advisors. Some have begun to explore the market, and the final guidance today will provide additional certainty and clarity. 

Today, we are unpacking our top six takeaways from the finalized regulatory guidance.

1. The final guidance largely affirms last June’s proposed transferability guidance. And for good reason — the market is taking off and stakeholders have developed a suite of workable strategies to utilize tax credit transferability based on the proposed regs. The final rules are likely to support this maturing market — building confidence in clean energy tax credits as a means for companies to manage their federal tax liabilities, and for project developers to maintain access to affordable capital.
2. Tax credits are a critical source of capital for clean energy projects and advanced manufacturers. Transferability unlocks those dollars more efficiently and makes investment more flexible across the capital stack. The IRS affirmed that future year tax credits can be used to underwrite loans, creating valuable liquidity for project developers. Technically, companies cannot sell their tax credits for cash prior to the year in which they are generated, but the IRS confirmed that companies are able to access loans related to the future tax credit value and/or a forward commitment to purchase the credits. “There is no prohibition on either a transferee taxpayer or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement, provided such loans are at arm’s length and treated as loans for Federal tax purposes.” Importantly, the IRS upheld the requirement that a tax credits sale must occur within the tax year in which the tax credits are generated (through the tax filing deadline), and that credits must be sold for cash. 
3. IRS affirmed that recapture will not be triggered for a tax credit buyer in the event of the sale of a partnership interest — a common feature of a tax equity partnership. In the case of a disposition of the partners’ interest (i.e. through a sale), the partner will retain the responsibility for recapture that would otherwise be attributable to the buyer. This clarification is important to ensure that tax credits remain liquid and transactable, and that buyers are not impacted by a standard-course partnership flip. Outside of this circumstance, recapture continues to follow the tax credit through the transfer process, and the risk of recapture applies both to the base tax credit and any bonuses. Very commonly, tax credit sellers obtain third-party insurance (or a parent guarantee) to help indemnify the tax credit buyer against these risks. 
4. Successful transactions require good communication between sellers, buyers, and their advisors — throughout a transaction and in the months and years to follow. Many of the risks that are managed in a transaction are first and foremost managed by the parties. The IRS clarified that tax credit buyers are able to “cure” their annual filings in the event that they (or the seller) determine that an error has occurred in filing. Importantly, if an excessive transfer has occurred, buyers are able to file amended returns or administrative adjustment requests (AARs) to correct the excessive transfer without penalty. Additionally, many of the risks that are managed in a transaction, including recapture and basis risks, are managed initially, at least, by the transacting parties.
5. Advanced manufacturing (45X) tax credits remain flexible, transactable, and popular. The guidance generally defines eligible entities as the owners of eligible clean energy property. But, in the case of 45X, the credit can be claimed by either a manufacturer of a component or the contracting party, affording unique flexibility. This allows a manufacturer to aggregate tax credits from US manufacturing facilities across their supply chain, including for facilities and components where they are working with a contract manufacturer. For companies with multiple manufacturing lines (owned and contract) this flexibility allows them to aggregate credit sales into larger deal volumes, which we have found to improve pricing. 45X credits are among the most popular credits on Crux. Nearly a third of 45X credits on Crux received a bid within the first 24 hours of listing, and 60% within the first week. 
6. The IRS provided straightforward rationale for their unchanged position on a few areas that received multiple comments, including on rules around individuals’ participation in the market. The IRS confirmed requirements that individuals and S-corps limit their use of tax credits to only tax liabilities arising from passive activities (that is, the Section 469 passive activity rules). Similarly, the Department retained the requirement that tax credit buyers and sellers may slice tax credits “vertically” but not “horizontally.” Practically, this means that credits with adders can be sold in pieces, but the adder portion cannot be separated from the base. Despite heavy volumes of comments on these topics, the market was operating on the assumption the IRS would not change their position. 

The role of technology

Finally, it’s clear technology will play a critical role facilitating successful transactions and building a liquid, efficient market. Navigating a transaction requires effective tools to communicate detailed information between stakeholders and facilitate project registration. In addition to Crux’s large network of tax credit sellers, buyers, and intermediaries, the platform’s workflow tools streamline these processes, manage risk, and increase certainty of transactions. 

Get in touch with us today to learn more about how Crux can help navigate this rapidly-growing market.