Delayed "Placed in Service" — Top Risks to Consider When Buying Tax Credits

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In our earlier blog post, “Understand the Top 5 Risks To Consider Buying Clean Energy Tax Credits”, we provided an overview of each risk. Now, we want to take a deep dive into the risk of a delayed placed-in-service date. 

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First, let’s review what it is and then we break down how you can mitigate it. 

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What is Placed in Service?

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A project is “placed in service” when a qualified renewable energy system or project is ready and available for its intended use. This term is significant because eligibility for certain tax credits, such as the Investment Tax Credit (ITC), is often tied to when a project is deemed to be "placed in service."

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Being "placed in service" typically means that the renewable energy system is capable of generating electricity or providing other qualifying services. This milestone signifies that the project is operational and is contributing to the production of clean energy for use.

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The “placed in service” date is crucial as it determines when the tax credit(s) can be claimed and applied to reduce tax liabilities. If a project is delayed, the projected payments and tax credit transfer schedule are both impacted and may no longer fall into the original tax year as planned.

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Let’s walk through an example. 

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You purchase a $10M tax credit for a project that is slated to be placed in service in late 2024. However, after unforeseen delays, the project is not placed into service until 2025. Based on your tax year, you won’t be able to take advantage of the tax deductions in 2024 as you had planned, and you will have to wait to use the tax deduction in your 2025 tax return. 

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How to Limit the Risk of a Delayed “Placed in Service” Date

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To help mitigate the risk of PIS timing when buying clean energy tax credits, buyers can take proactive measures during the deal process. 

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• Due Diligence: Conduct comprehensive due diligence on the project to understand the estimated completion date and any risks associated with timing.
• Monitor Progress: Regularly monitor project milestones and associated development progress that could impact the project's qualification status and placed in service date.
• Add Additional Assurance: Consult with Atheva on requirements for a transaction to help mitigate a specific tax credit. This may include insurance, a hold-back provision, indemnities, contract provisions in the event of a delay, and/or guarantees. 

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In addition, Atheva recommends developers have forward contracts so buyers can regularly be updated on key milestones.

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Conclusion

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Although placed-in-service timing is a risk, it is a fairly low risk, and the ability to carryback tax deductions provides more flexibility for buyers who want to target specific tax years within the past three years. 

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A partner, such as Atheva, can conduct the due diligence, provide guidance on the right mitigation tactics, monitor the project, and facilitate payments. 

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