Eligible Basis and Allowance — 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 eligible basis and disallowance. 

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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 Eligible Basis and Disallowance?

Eligible basis refers to the portion of the total project costs that are considered qualified expenditures eligible for certain tax credits such as investment tax credits.

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Disallowance refers to the reduction or disqualification of certain costs or expenditures from being considered part of the eligible basis for tax credit purposes.

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The amount of tax credits available to be claimed for a project can be impacted if the eligible basis isn’t correctly calculated or certain costs are disallowed. Sellers may inflate this value through a step-up or by simply misunderstanding eligible investments.

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Mitigation Tactics & Strategies  

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If the eligible basis or allowance is incorrectly calculated when buying clean energy tax credits, there are several steps and strategies a tax credit buyer can take. 

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First Steps

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• Review and Recalculatesome text
  • Have a thorough review of the eligible basis and allowance calculations conducted. Ensure all eligible costs have been included and that the calculations align with the relevant tax code provisions.
• Consult a Tax Professionalsome text
  • Engage tax advisors or CPAs with expertise in clean energy tax credits to review the calculations and identify any discrepancies or errors.

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Corrective Actions

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• Amended Tax Returnssome text
  • If the error has been identified after tax returns have been filed, prepare and file amended tax returns (Form 1040X for individuals, Form 1120X for corporations) to correct the eligible basis or allowance.
  • Document the reasons for the amendment and provide supporting evidence.
• Adjustment Claim Amountsome text
  • Adjust the amount of the tax credit claimed in the current or future tax returns to reflect the correct eligible basis or allowance.
  • Utilize any carryback or carryforward provisions to apply the correct credit amounts to different tax years, if applicable.
• Connect with the Project Developersome text
  • Communicate with the sellers of the tax credits to address the discrepancy. Ensure that any contractual obligations related to the sale of the credits are met and that both parties agree on the corrected calculations.

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Preventative Measures

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To help mitigate this from happening in the first place, we recommend that you have a robust due diligence process before purchasing the tax credits to identify any potential risks. If you are working with a partner, like Atheva, they can conduct the due diligence to ensure confidence in the credit. 

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In addition, it is best practice to include a warranty or indemnity in the purchase agreement to help protect against these inaccuracies. These clauses can obligate the seller to compensate for any discrepancies found after the purchase of the credit.

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Conclusion

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Although inaccuracies in eligible basis and allowance can be a risk when buying clean energy tax credits there are many ways to proactively address and remedy if needed. At Atheva, we aim to help mitigate this risk by conducting due diligence, providing guidance on the right mitigation tactics, monitoring the project, and facilitating payments for all the transactions on our managed marketplace. 

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