New Rules on Commercial Solar Tax Credits
Basic Facts About Transferring of Solar Tax Credits
In 2022, new U.S. federal tax policy was included in the Inflation Reduction Act which allows corporations to buy transferable tax credits from renewable energy developers. This change was in addition to increasing the Investment Tax Credit allowed from 26% to 30%. Transferability allows tax credits to be sold. Buyers in case may be expert investors who are required to take an equity position in the solar project. But even more useful with the new rules, organizations or individuals that have a federal tax obligation are allowed into the market simply to buy the credits.
What Are Transferable Tax Credits?
A transferable tax credit is a one that can be transferred or sold legally to another taxpayer or tax-paying entity for cash. Federal transferable tax credits are most often used as an incentive for businesses to invest in a certain area or industry, like renewable energy.
The tax credits must be exchanged for cash with an unrelated party. The cash received will be treated as tax-exempt income. The cash paid by the buyer is a nondeductible expense. The credits can only be sold once, so it’s important to understand the impacts before arranging a sale.
The Reason for Allowing the Transfer of Tax Credits
There are two stated goals for the change in policy to allow transfer of any clean energy tax credits. One is to make more buyers eligible for solar without concern for having sufficient tax liabilities. Another goal is to increase investments in solar by companies across the country.
The Basic Rules for the Transfer of Tax Credits
Early in the process of considering your solar investment options, it may be useful to investigate the transfer or sale of tax credits available to the investor. Here are a few rules to understand, however this list is not complete. As a solar buyer moves closer to a final purchase decision, a tax advisor should be consulted to review all applicable restrictions and notices.
- Credits cannot be sold for progress expenditures.
- Credits can only be sold one time.
- Buyers can use credits against estimated income tax.
- Buyers can use credits against estimated income tax.
- Buyers can use credits via a 3-year carryback or a 22-year carryforward of unused credits. However, credits cannot be sold if they are in carryforward or carryback status.
Some Limitations to Transferring the ITC Tax Credits
Buyers of the ITC credits expect discounted payments. Like most financial trading markets, the transfer and selling of tax credits follows supply and demand principles. Many sellers will offer a discount to accelerate an agreement. And for buyers, purchasing credits at a discount to the value (e.g., $0.95 cents per $1.00 of credit) do not include the discount in gross income for tax purposes.
The window for the sale of the ITC credits is not immediate. The credits themselves are generated only after the project is complete and can be monetized only during a specified time frame that begins in the year that the project is placed in service. The seller may want to use the income from the sale towards the solar project payments. Clearly, the seller must wait until the project is completed. Buyers, of course, want to delay the transfer of cash to better match when they would have had to make payments to the government or even later.
Unique Direct Pay Plan for Non-Profit Organizations
The 2022 policy change also included non-profit organizations which have neither sufficient cash available nor any tax obligations. Unlike competitive grant and loan programs, Direct Pay allows tax-exempt entities to receive a payment equivalent to the total value of solar tax credits.
As a result of this new provision, the federal government will cover 30% or more of the solar installation cost for qualifying systems, even though those organizations don’t have tax liability.
At Cabral Solar, we are always operating with a “customer first” approach. In every stage of the EPC project process, we communicate the essential progress to each client and consult and advise whenever key decisions are needed.