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Tax credit transferability is an increasingly popular option that allows clean energy projects to monetize tax credits by selling them for a cash value. The selling process involves qualification and due diligence steps to ensure compliance, mitigate risks, and secure the maximum value.
In this blog post, we'll explore what sellers need to prepare to successfully transfer their tax credits and get the most value out of their tax credits.
Before diving into the transaction process and marketing their credit to buyers, sellers must ensure their tax credits are eligible for transfer. Here are the key steps involved:
1. Verify Eligibility: Not all tax credits are transferable and there are only 11 clean energy/renewable tax credits that are eligible. For example, individuals are not eligible to sell their tax credits from their residential solar installation. The first step is to confirm that the specific credit can legally be transferred under state or federal law. Reviewing the relevant tax code and consulting with a tax advisor or attorney is recommended. More detail on the eligible credits can be found at 6418(f)(1)(A).
2. Provide Credit Validity: Ensure that the credits are valid and have not expired. This involves reviewing the issuance date, the period for which the credit applies, and any carryforward provisions. This could be a legal memo or opinion from a third party supporting the validity of the tax credit.
3. Gather Additional Documentation: Gather all supporting documentation that proves the validity and eligibility of the credits. This may include a statement of qualifications, an appraisal, a project timeline, evidence of insurance policies, proof of ownership, and any agreements, certifications, or documentation supporting adders.
Due diligence is a critical part of a successful tax credit transfer, involving a thorough review to identify and mitigate potential risks for a buyer. Here's what sellers need to prepare:
1. Financial Statements: Provide comprehensive financial statements or an audit review to demonstrate the financial health and stability of your business. This reassures buyers of your credibility and reduces perceived risks.
2. Credit History: Maintain a detailed record of the tax credit history, including how and when the credits were earned, any previous transactions involving the credits, and any challenges or disputes related to them.
3. Term Sheet: Prepare legal documents that outline the terms and conditions of the transfer. This includes a transfer agreement that specifies the sale price, payment terms, and any representations or warranties. With Atheva, you can provide a custom Term Sheet or use the Atheva template as a starting point.
4. Third-Party Verification: Engage a third-party auditor or tax advisor to provide support for the pricing and cost structure with a Cost Segregation Report. This will boost buyer confidence and facilitate smoother negotiations.
5. Risk Assessment: Conduct a thorough risk assessment to identify any potential legal, financial, or operational risks associated with the transfer. Mitigate these risks through appropriate measures, such as obtaining insurance or providing indemnities.
To help prepare and speed up the buying process, download our checklist of documents sellers need to gather for qualification and due diligence.
By thoroughly preparing for qualification and due diligence, sellers can maximize the value of their tax credits, ensure compliance, and build trust with buyers. As tax credit transferability continues to gain popularity, staying informed about the latest regulations, market trends, and best practices will be crucial for both sellers and buyers. By fostering due diligence and strategic planning, sellers and buyers can benefit from working with Atheva on their tax transferability plan.
Ready to get started? Contact us to learn more about how we can help you.
