The passage of the Inflation Reduction Act (“IRA”) has ushered in a new era of opportunities for businesses and organizations aiming to invest in renewable energy. The Act, among other things, provides credits for developing or investing in facilities utilizing or producing solar energy, Investment Tax Credits (“ITCs”).  The IRA also provides transferability and elective pay provisions, which for businesses and tax-exempt organizations, can be a game changer, offering flexibility and financial benefits for entities interested in participating in the renewable energy sector.

What Are Investment Tax Credits (ITCs)?

Investment Tax Credits (ITCs) are credits calculated based on the cost of building a qualifying solar energy system before December 31, 2024. The IRA also expands and extends the ITC program, offering businesses credits for investing in or developing facilities that produce renewable energy generally, such as solar, wind, geothermal, and other clean energy technologies placed in service after December 31, 2024. These credits can offset a substantial portion of the upfront costs associated with the development of renewable energy facilities.

The standard ITC is equal to 30% of the eligible project costs, with opportunities for additional bonuses if certain labor, domestic content, and location-based requirements are met.

The Game-Changer: Transferability of ITCs

One of the most notable features introduced by the IRA is the ability to transfer ITCs. Under the IRA, taxpayers can now transfer ITCs to an unrelated taxpayer for cash, offering a new level of flexibility.

This transferability provision allows businesses without sufficient tax liability to fully utilize the ITC, unlocking capital from parties eager to offset their tax obligations. ITCs are not refundable for individuals or for-profit corporations, so the credits can only be used against federal taxes owed in a given year (though unused credits may be rolled forward) or sold. Now, a developer of a solar project with minimal tax liability can sell their ITC to an unrelated taxpayer with tax liability, creating a mutually beneficial arrangement: the developer receives upfront cash while the purchaser reduces their tax liability.

Key features of the transferability provision include:

• One-Time Transfer: The transfer of ITCs can only occur once. After being sold, the credit cannot be resold by the purchaser.
• Tax Treatment: The cash received from selling the ITC is tax-free, adding to the attractiveness of the transaction.
• Documentation Requirements: To ensure compliance, proper documentation and reporting are required during the transfer process. There are many pitfalls for the unwary in this regard, as there are specific requirements for the forms that must be filled out, statements written on and attached to a tax return, and the documentation that must be provided and attached to both the transferors return and transferee’s return.

The Direct Pay Option: A Lifeline for Tax-Exempt Organizations

The IRA also introduces an “elective pay” option, allowing non-profit organizations, governmental entities, and other tax-exempt entities to benefit from ITCs despite lacking tax liability. Through direct pay, eligible entities can receive a tax refund payment equivalent to the value of the credit. This provision allows non-taxable entities like schools, hospitals, and local governments to participate in the green energy transition.

Strategic Considerations for Businesses

The ability to transfer ITCs or opt for direct pay opens up strategic options for businesses and organizations looking to finance renewable energy projects. Here are a few considerations:

• Cash Flow Opportunities: Selling credits can provide immediate liquidity for developers and investors, easing the upfront financial burden of renewable energy projects.
• Partnership Models: Businesses may explore partnerships with investors who are primarily interested in purchasing ITCs, enabling project financing models that were previously unavailable.
• Compliance and Reporting: Navigating the new provisions requires careful planning to ensure compliance with the documentation and reporting requirements associated with ITC transferability and direct pay.

Conclusion

The Inflation Reduction Act’s transferability and direct pay options represent significant advances in making renewable energy investments more accessible and financially attractive. Businesses, non-profits, and tax-exempt organizations now have a range of flexible strategies to benefit from renewable energy credits, whether through direct participation, credit transfer, or direct payment options.

As always, navigating the nuances of these new provisions requires expert guidance. RS&F is here to help you explore how your organization can maximize these opportunities under the IRA. Whether you’re looking to invest in renewable energy projects or need advice on optimizing your tax position, we’re ready to assist every step of the way.

-Cedar Bauer, Esq., Tax Research Associate