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In the realm of clean energy investment and sustainability initiatives, purchasing clean energy tax credits can be an appealing way to support renewable energy projects while reducing tax liabilities. However, buyers need to be aware of certain risks often associated with buying clean energy tax credits.
Now, let’s break down each of their definitions and impact.
Recapture refers to the potential clawback of tax benefits previously claimed if certain conditions or requirements are not met after investment tax credits have been earned. The full value of a credit is earned once a project is placed in service (more on that next). Then, for five years, the tax credit is subject to recapture if the property ceases to be a qualified energy facility or a change in ownership occurs. The recapture rate would be 100 percent during the first year and the rate declines by 20 percent each year until the end of the fifth year. In the context of clean energy tax credits, recapture typically arises when the clean energy project fails to maintain compliance with specific eligibility criteria or experiences a change in circumstances that affect its qualification status.
Impact:
If recapture is triggered, repayment of the tax benefits would be required and the buyer of the tax credit is responsible.
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."
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 contributing to the production of clean energy for use or sale.
Impact:
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 impacted and may no longer fall into the original tax year as planned.
Read more on "placed in service" (PIS)
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.
Disallowance refers to the reduction or disqualification of certain costs or expenditures from being considered part of the eligible basis for tax credit purposes.
Impact:
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.
Read more on eligible basis and disallowance
The financial stability, reliability, and ability of the entity or individual selling clean energy tax credits to fulfill their obligations and deliver the promised tax credits or associated benefits to the buyer.
Impact:
If the seller lacks financial stability or credibility, there may be concerns about their ability to deliver the tax credits, maintain project performance, or satisfy any indemnification obligations.
A back stop functions as a form of insurance. While it’s not an actual insurance policy, a company can provide a guarantee to help enhance the security of the credit if the credit is deemed to be no good. For example, this could be a money-back guarantee, property lien, or a parent company willing to unwrite.
Impact:
It’s easy for sellers to offer an indemnification back stop so if nothing is provided it is a red flag and a risk for the buyer.
Although these are common risks, not all credits have these risks. Connect with the Atheva team to learn more about the associated risks for your personalized tax credit matches and the best ways to mitigate them.
