Overview
Over the summer, the US Department of the Treasury and the Internal Revenue Service released highly anticipated guidance for Internal Revenue Code (Code) Section 6418. Since then, the tax credit transfer market has been extremely active. During this webinar, McDermott partners discussed how these transactions are interacting with traditional monetization structures, key deal terms, the importance of insurance and procedural requirements. Key contacts include Heather Cooper, Debra Harrison, Joel Hugenberger and Philip Tingle.
Top takeaways included:
- Enacted under the Inflation Reduction Act of 2022, Code Section 6418 permits eligible taxpayers to sell all or a portion of their tax credits to a non-related buyer. Following the transfer, the buyer will be treated as the taxpayer under the Code. The sale of the tax credits must be for cash and the buyer is not permitted to resell or transfer the tax credits.
- The tax credits that can be transferred include but are not limited to: Section 45 production tax credits (typically wind), Section 48 investment tax credits (typically solar, battery and fuel cells), vehicle fueling credits, hydrogen credits and renewable natural gas clean fuel credits.
- Sellers must be the “eligible taxpayer” with the right to claim the tax credits. For example, in a tax equity structure, the seller is the tax equity partnership, and the sponsor and tax equity investor must determine who will backstop the indemnification obligations owed to a buyer.
- Buyers must have US taxable income and liability in order to use the tax credits. Buyers can only offset 75% of their total tax liability.
- The purchase price for tax credits is currently trending above $0.90 per dollar of the tax credit, including brokers fees, insurance premiums (if any) and expenses. No payment can be made until tax credits accrue (g., the project is placed in service) and may be staggered so that the final payment is made around the same time a tax return and transfer election statement are filed. However, the final payment must be made no later than the last filing deadline.
- Buyers are extremely risk-adverse so many view tax credit transfers as an asset purchase, not an investment in the project akin to a tax equity deal.
- The agreements used to effectuate the transfers generally include representations and warranties regarding the eligible taxpayer’s ability to sell the tax credits; legal representations as to the eligibility for and the quantity and quality of the tax credits; and covenants regarding recapture, reduction, loss and disallowance of the tax credits and compliance with Section 6418 transfer requirements.
- Buyers expect broad indemnities and sufficient credit support to back said indemnities.
- Tax credit insurance policies are being utilized to cover the risks associated with purchasing tax credits, particularly where a seller’s credit support is insufficient.
