The Inflation Reduction Act is providing mechanisms for transferring tax credits for clean energy projects, incentivizing developers and investors to get involved, along with their tax advisors.
The 2022 law created two new credit delivery mechanisms —
One startup company that's looking to leverage those mechanisms is
"The tax credits are made transferable for the first time ever," said Crux Climate CEO Alfred Johnson. "Certainly, it is the principal mechanism by which Congress and the government are incentivizing the transition to renewable energy and decarbonization, but what it requires is a brand new market for those transferable tax credits that needs to be built entirely from scratch."
The company has raised $8.85 million across two seed rounds from investors including Lowercarbon, Overture, QED, Ardent Venture Partners, Orsted, LS Power, Hartree and Canapi.
The company has some competitors.
Companies are expecting to see the clean energy tax credit business grow quickly.
"It became legal to transact the credits as of January 1 of this year," said Johnson. "The Treasury put out some guidance in the middle of June to help stabilize the market and give it some certainty about what the rules and standards would be, and the first deals are just starting to get announced. But when we think about the volumes here, this is going to get pretty big pretty quickly. The annual volume is anticipated to grow to as much as $85 billion by 2031."
He contrasted that to the total amount of corporate taxes paid by all U.S. corporations, as forecast by the Congressional Budget Office, at $527 billion. "Roughly 15% of all corporate taxes would need to go through the tax credits in order to clear the market if we reach those kinds of volumes," said Johnson. "It is not often that a new asset class of this size and scale is emerging."
Prior to passage of the IRA, it was possible to use a tax equity structure or transaction to transfer clean energy tax credits, but the law makes it easier to accomplish.
"It was technically possible to monetize your credits to an owner of an asset prior to the IRA, but that was a very complex tax structure called tax equity that is now going to be a feature of the market," said Johnson. "It's supplemented by this simpler structure of transferability."
There are a number of categories of federal credits that can be sold associated with clean electricity, solar, wind, battery storage, charging infrastructure, hydrogen, advanced manufacturing, carbon capture and direct air capture.
According to the IRS, the 12 tax credits that can use elective pay include:
- The Energy Credit (48), (Form 3468, Part VI);
- The Clean Electricity Investment Credit (48E), (Form 3468, Part V);
- The Renewable Electricity Production Credit (45), (Form 8835, Part II);
- The Clean Electricity Production Credit (45Y);
- The Commercial Clean Vehicle Credit (45W), (Form 8936, Part V);
- The Zero-emission Nuclear Power Production Credit (45U), (Form 7213, Part II);
- The Advanced Manufacturing Production Credit (45X), (Form 7207);
- The Clean Hydrogen Production Credit (45V), (Form 7210);
- The Clean Fuel Production Credit (45Z);
- The Carbon Oxide Sequestration Credit (45Q), (Form 8933);
- The Credit for Alternative Fuel Vehicle Refueling / Recharging Property (30C), (Part 8911, Part II); and,
- The Qualifying Advanced Energy Project Credit (48C), (Form 3468, Part III).
"It is the broad swath of credits that businesses and companies will put in place as they build renewable energy and decarbonization infrastructure, but categorically it stretches across a bunch of different credit types, which should facilitate development in a lot of different areas," said Johnson.
Once a renewable energy facility is placed in service, it can qualify for tax credits that can be sold by the developers to investors, almost by necessity.
"If you take a community solar facility, that facility might cost $10 million to build," said Johnson. "You would be eligible for the investment tax credit associated with the cost of construction there, the capex. That ranges from 30% up to 60%, depending on what 'adders' are associated with that. Do you use domestic content? Is it in an energy community? Who are the offtakers of the power? Are they low- and moderate-income? Using simple math here, say you're getting the 30% investment tax credit, you would get $3 million worth of tax credit when the project is placed in service, but the project developer, you get paid for power over 40 or 50 years, so your tax liability doesn't match the scale of the tax credit that you get at the front of the transaction. Even if you used a small piece of tax credit against your own tax liability, you wouldn't come anywhere near consuming the whole, so you need to sell it."
"The developers generally think of this as a cost of capital kind of consideration," he continued. "What is the highest price that they can go sell the credit at and then recycle capital into new developments? And so it becomes one of three sources of capital into the project: the tax credit, the equity and the debt. They have an existential need to be able to sell the credit at the highest price in order to maximize the value of the project and go build more energy infrastructure."
He believes intermediaries like his company will be essential to the newly developing market for clean energy tax credits. That will lead to more demand for tax advisors to play a role as well.
"We're going from a world in tax equity where about 40 to 50 companies, largely banks, are providing tax equity on an annual basis," said Johnson. "We need to get to a world that has thousands of corporate buyers. It is less common that individual corporations are seeking the market on their own. In many cases, they're talking to their tax advisor as the first stop and thinking about the ways that they can be most efficient in managing their effective tax rate while investing in sustainability. As a result of that, tax advisors are in an extremely important position in the transaction, and many are increasingly talking to their clients about these renewable energy tax credits and need tools to be able to process transactions for their clients and also source supply."
His company is mainly dealing with projects that are in advanced stages of development and getting closer to their "placed in service" date. But he sees a role for tax advisors in helping provide due diligence on the projects before an investor buys the tax credits. He believes the tax credits will be around for a long time, despite efforts by Republicans in Congress to
"The first thing to know is that the credits are put in place for a pretty long time," said Johnson. "The clean electricity credits are put in place for 10 years, or until we get to 25% of 2022 greenhouse gas emissions levels. So in current law, they will be in place until 2032 or beyond, depending on what our progress is against the 2022 greenhouse gas emissions levels. When you're talking about any change that Congress would make, they would have to take away the credits and repeal current law, which if you look at the history of tax credits, happens a lot less frequently."
He sees growing support for clean energy tax breaks, including among Republicans and in conservative-leaning rural parts of the country. He pointed out that many of the renewable energy tax credits are associated with projects built in rural areas.
"A lot of the investment is going into historically Republican-leaning or Republican-controlled states," said Johnson. "There are really significant benefits that extend widely from the continued existence of the credits. If you look at the debt limit legislation from earlier this summer, there was some effort to do some restriction or reduction of the credit amounts, but that fell off the table pretty quickly as people looked at the benefits."
The growing impact of climate change across the country is also convincing more people to do something to lower the record-setting temperatures seen this summer.
"We are living in a different climate reality than even we were when the IRA passed," said Johnson. "The skies in New York were orange in June, and people in the Great Lakes were dealing with the Canadian forest fires over the entire summer. I think the political realities around climate and the visceral changes to the world around us are something that will inform our politics around this."
The Inflation Reduction Act's reliance on tax credits rather than tax increases may also help it endure.
"The IRA is interesting because it's overwhelmingly benefits for building energy transitioning infrastructure," said Johnson. "It has very few penalties for things like carbon emissions by its construction as a law. It's more carrots and sticks, and generally carrots make more friends."
Tax professionals can advise different types of clients to consider the clean energy tax credits now available.
"The people that are buying them are achieving a 5% to 15% savings on federal taxes, and you're investing in energy infrastructure and sustainability, so it meets a dual objective there," said Johnson. "I think for tax professionals, this is going to be a very widely distributed product in a large market. Companies need advice. They need to lean on their tax professionals to understand what is a viable strategy here. They will look for tax advisors for support on the diligence of credits that they may be buying in some cases. And so the tax advisors are really fundamental to companies of all sizes participating in this market."
He is seeing more interest from tax advisors in the market for clean energy tax credits. "Tax advisors are talking to their clients," said Johnson. "Their clients represent demand in most instances, and figuring out how they can efficiently source supply is a challenge."
