Key Takeaways | Corporates As a New Source of Capital Under Transferability

During the latest webinar in the Navigating the New Energy Landscape series, McDermott Partners Carl Fleming and Philip Tingle were joined by guest Gabe Rubio, a partner in BDO USA’s business incentives group practice. They had a lively discussion about the Inflation Reduction Act of 2022 (IRA)’s transferability provision, which permits the transfer of renewable energy tax credits to an unrelated third party in exchange for cash.

Key takeaways:

1. Tax credits will likely be a top tax-planning opportunity for corporations in the future. They provide a simpler means of impacting effective tax rate. They also achieve multiple goals through a single transaction, such as allowing the investor to pursue transactions with a sustainability component while also receiving tax credits. As the market becomes more familiar with these concepts, the market for smaller transactions should also increase over time.
2. The IRA’s transferability provision has democratized access to tax credits by expanding the availability of these credits to nontraditional corporate investors.
3. While there is some “guidance paralysis” within the industry, many developers and corporates transact on the current guidance. These corporates typically have prior experience in state credits, film credits or other pre-existing credits markets.
4. Investors have demonstrated an interest in transactions involving transferable tax credits ranging from $5 million to $300 million. This is because the transferability provision has reduced traditional barriers to entry such as the cost of advisors, internal requirements for investing through partnerships and other tax complexities raised in obtaining these credits. By simplifying the process, tax credits have become more appealing to a broader universe of potential investors, namely corporates.
5. Buyers are typically corporations with predictable taxable income. However, changes to the carryback rules and Section 174 research and development (R&D) amortization rules may cause a spike in 2023 taxable income, potentially driving significant interest in deals toward the end of the year as investors seek projects placed in service in 2023.
6. Transacting “early” provides certain benefits to early movers, such as better prices. Interest in transferable credits should only increase after guidance is released, as more conservative investors also begin to participate in these transactions.
7. Education is critical for convincing investors who are unfamiliar with these types of tax credits to begin investing. Helping them understand the history of tax credits and tax equity should increase investor comfort with transferable credits. For more risk-averse taxpayers, tax credit insurance may offer an additional source of comfort.