Banks Find Tax Savings With Energy Tax Credit Purchases

The tax credit transferability provision in the Inflation Reduction Act (IRA) will continue to benefit banks and other companies, despite the passage of new legislation this year that undid or reduced many of the green energy incentives of the IRA.

Introduction to Tax Credit Transferability
The IRA, passed in August 2022, introduced several key provisions aimed at promoting green energy initiatives, including increased tax credits for renewable energy projects.

The IRA included a tax credit transferability provision, which allows taxpaying banks to purchase green energy tax credits at a discount. Developers that do not have sufficient tax liability to use the credit can receive cash by selling the credit to a third party.

Banks with an appetite for tax savings can purchase the credits at a discounted price compared to the credit’s face value. Ultimately, this provision enables companies to support sustainable energy initiatives while benefiting from federal tax savings.

Banks, many of which have historically been active in the tax credit investment space, can purchase tax credits to directly offset current year estimated tax payments and even carry back credits for a refund of prior taxes paid.

For banks looking to find tax savings opportunities while supporting sustainable energy initiatives, this continues to be a logical strategy to explore.

Risk Management Strategies Within the Tax Credit Market
Potential investors can help protect themselves through seller-provided contractual indemnifications, parent company guaranty and tax insurance. The ultimate risk mitigation approach is driven by the type of credit and tax credit seller, but these measures help protect investors in the unlikely event that the Internal Revenue Service (IRS) adjusts the credit.

In addition, despite early drafts of the One Big Beautiful Bill Act (OBBBA) proposing rollbacks to tax credit transferability, the final legislation preserved the Internal Revenue Code Section 6418 credit transferability framework, albeit with some other changes for renewable energy developers.

Thus, from a purchaser’s perspective, the passage of OBBBA provided market certainty, and many banks and financial institutions are proceeding with tax credit transactions at a frenzied pace.

Pricing and Availability of Energy Tax Credits
The market for these tax credits has been robust, with pricing generally ranging between 88 and 95 cents on the dollar. The exact pricing depends on the type of technology and the underlying credit, with different seller profiles catering to varying levels of risk aversion and price sensitivity. Key transferable credits include the Production Tax Credit (PTC) under Section 45 and Section 45Y, the Investment Tax Credit (ITC) under Section 48 and Section 48E, the Clean Hydrogen Credit under Section 45V, the Advanced Manufacturing Credit under Section 45X and the Clean Fuel Production Credit under Section 45Z.

In addition, OBBBA introduced a suite of other tax reforms that may significantly reduce corporate tax liability for other industry segments. Key provisions include the reinstatement of 100% bonus depreciation, allowing corporations to fully expense qualified capital investments such as machinery and equipment in the year they are placed in service. The law also restores immediate expensing of domestic research and development (R&D) costs, reversing prior amortization rules. These provisions, while not necessarily applicable to financial institutions, have eliminated tax credit buyers from other industry segments from the credit market, thereby creating additional purchase opportunities for banks.

The transferability of renewable energy tax credits presents a valuable opportunity for banks and other financial institutions to reduce their tax liabilities while contributing to sustainable energy projects. Work with experienced advisors who can guide and support your organization throughout the entire process.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CLA) to the reader. For more information, visit CLAconnect.com.

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