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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 recapture.
First, let’s review what it is and then we break down how you can mitigate it.
Recapture refers to the potential clawback of tax benefits previously claimed if certain conditions or requirements are not met after the tax credits have been utilized.
So, if recapture is triggered, repayment of the tax benefits would be required.
Clean energy tax credits are often contingent upon the successful operation and compliance of the associated renewable energy project. If the project fails to meet performance standards or undergoes changes that impact its eligibility (such as ceasing operations or not meeting production targets), there's a risk that previously claimed tax credits could be subject to recapture.
Many clean energy tax credit programs have strict rules regarding project ownership and control. If there's a change in ownership structure or control of the project without adhering to program guidelines, it could trigger a recapture of the tax benefits associated with the project.
Some tax credits have specific expiration dates or termination conditions. If the tax credits are utilized but the project fails to maintain eligibility for the entire credit period, recapture provisions may apply, requiring repayment of the tax benefits.
Although unlikely, changes in government policies, tax laws, or regulatory requirements can impact the eligibility of the tax credit. If new regulations affect the project's qualification status retroactively or going forward, it could trigger a recapture of previously claimed tax benefits.
To help mitigate recapture when buying clean energy tax credits buyers can take proactive measures during the deal process.
At Atheva, we want to minimize additional work during the deal process. As an extra measure of security, we conduct a preliminary review of counterparties and projects before accepting them on our managed marketplace to ensure the validity and accuracy of the tax credits.
Although recapture is a risk when buying clean energy tax credits there are many ways to mitigate it. By understanding the factors that can trigger recapture and implementing proactive mitigation strategies buyers can maximize their benefits and minimize potential drawbacks when buying tax credits.
This may seem daunting, but buyers don’t have to navigate these tactics on their own. A partner, such as Atheva, can conduct the due diligence, provide guidance on the right mitigation tactics, monitor the project, and facilitate payments.
