Buying clean energy tax credits is the innovative way to generate a return on cash, boost your company’s earnings, reduce your effective tax rate, and support clean energy development.
Under federal law, certain clean energy tax credits are transferable.
When project developers generate more credits than they can utilize themselves, they are allowed to sell those credits to third parties. The credits are typically sold at a discount which means a benefit to both parties. The developer monetizes tax credits that would have otherwise been unused, and the buyer realizes cash and financial statement benefits by purchasing the tax credits at a discount to their face value.
A body of rules and regulations governs this process. That framework first established under the Inflation Reduction Act (IRA) was preserved, though importantly refined, by the One Big Beautiful Bill Act (OBBB). To help summarize what the rules entail, below are answers to some of the most commonly asked questions.
Smith Dierking is ready to help you with these or any other questions you have. We will ensure you are comfortable in your understanding and confident in your decision as you step forward.
Q
What kinds of tax credits are involved?
A
These are transferable tax credits (TTCs) generated from various clean energy related initiatives.
Section 6418, first introduced by the IRA, created a new mechanism for monetizing certain tax credits. There are 11 clean energy tax credits eligible to be sold for cash to an unrelated taxpayer. Early on, the most transacted were credits from solar, wind, and advanced manufacturing projects. The market has broadened considerably and now also includes meaningful volume from battery storage, nuclear, and bio/clean fuels projects.
Q
How did OBBB change things?
A
Perhaps the most important point for buyers is what didn’t change: transferability under Section 6418 was preserved for the full duration of each credit’s eligibility period.
Early drafts of the legislation proposed sunsetting or repealing transferability entirely. The final law kept it intact, which gave the market a level of certainty it had been waiting for. In other areas, the law did make several important changes, including:
- Foreign Entity of Concern (FEOC) rules. Certain credits cannot be claimed by prohibited foreign entities (PFEs) or entities which engage in certain restricted activity with PFEs. These restrictions are central to determining eligibility for those credits.
- Accelerated timelines for wind and solar. Wind and solar projects that began construction after July 4, 2026 must generally be placed in service by the end of 2027 to qualify for the clean electricity credits. Energy storage is not subject to that placed-in-service deadline.
- Continued support for other technologies. Clean fuels (Section 45Z) were extended through the end of 2029, and credits for storage, advanced manufacturing, nuclear, geothermal, hydrogen, and carbon capture remain available.
Q
Who can buy TTCs?
A
The most common buyers are widely held C corporations.
For other buyers, such as individuals, estates, trusts, personal service corporations, and closely held C corporations (more than 50% owned by five or fewer individuals), the passive activity loss rules of Section 469 generally limit the ability to utilize credits. Taxpayers should consider the impact of Section 469 limitations before initiating a purchase. In addition, buyers should confirm they are not ineligible to claim credits under the FEOC rules.
Q
How much tax liability can be offset with TTCs?
A
Generally, up to 75% of federal tax liability can be offset.
Q
What are the rules on carryback and carryforward of TTCs?
A
TTCs can be carried back three years and carried forward 22 years.
Notably, when carrying back TTCs, credits must first be applied to the earliest year in the carryback period (three years before the current tax year). Any remaining unused credits can then be used for the year that is two years before the current year and then finally to the year before the current year.
Q
Can TTCs be resold?
A
No, TTCs may only be transferred once.
While the transfer is irrevocable and reselling is prohibited, buyers of TTCs have extended carryback (three years) and carryforward (22 years) periods available to utilize purchased credits.
Q
When can TTCs be applied against tax liabilities?
A
Buyers are allowed to consider, in determining estimated tax payments, TTCs they intend to purchase.
While buyers can offset quarterly estimated liabilities with TTC purchases they intend but have not yet completed, they remain liable for underpayments should the TTCs not be obtained as intended.
Q
How and when must TTCs be paid?
A
TTCs must be paid for with cash.
The buyer must make cash payments to the seller during the period that begins with the first day of the seller’s tax year in which the credit is determined and ends with the due date for the seller’s tax return, including extensions.
While buyers and sellers are allowed to agree on the sale of credits to be generated in future tax years, payments in advance of that period are not allowed.
Q
Why does the law allow credit transferability?
A
A primary goal of the IRA was to accelerate the transition of the United States to greener, renewable energy sources. Prior to the IRA, the financing of clean energy projects was heavily dependent on tax equity structuring, a complex and expensive process dominated by a few very large participants.
Credit transferability democratizes the financing of clean energy projects, opening a way for far more participants to join in. Project developers now have more options as they plan their investments, eliminating potential bottlenecks in the system and speeding the deployment of clean energy projects. The OBBB’s preservation of transferability reinforced that this is a durable, well-established part of the tax code.
Q
Is the purchase of TTCs a deductible expense?
Is the discount on the purchase taxable income?
A
No and no.
The purchase price of the TTCs is not deductible by the buyer (and is not taxable to the seller). Also, the discount received by the buyer on the purchased TTCs is not taxable to the buyer.
Q
How does pricing work?
A
The price for TTCs is typically expressed in cents on the dollar of the face value of the credits. For example, TTCs sold at a 5% discount are priced at $0.95.
The particular price for given TTCs is subject to negotiation and depends on a number of factors. Considerations such as the type of credit, type of technology, project size, purchase amount, creditworthiness of the seller, and the presence of indemnities and/or insurance all affect the overall risk profile. The more risk involved, the greater the discount should be.
While there is variation in each unique purchase, a general price range to consider for high-quality TTCs is from roughly $0.90 to $0.96. Pricing has become more dispersed; investment-grade sellers and certain credit types command the strongest pricing, while smaller or non-investment-grade deals price lower.
Q
How do I measure my return?
A
Consider a purchase of $50 million of TTCs priced at $0.92. The buyer’s investment of $46 million cash ($50 million at 92 cents on the dollar) leads to a $4 million reduction in cash outlay on tax liability (the tax liability is offset for the full $50 million face value but at an actual cost of $46 million). The $4 million return on the $46 million investment computes to 8.7%.
More accurately, detailed calculations for actual return would also include timing factors such as when payments are made by the buyer and when any required estimated tax payments are due. For example, a buyer could reduce Q1 estimated tax payments based on TTCs they actually pay cash for in Q4. Such timing arrangements can significantly increase the IRR achieved on your cash investment in TTCs.
Other important measures of return focus on the financial statement benefits, including the reduction in total tax expense recognized as the credits are utilized, along with the resulting decrease in effective tax rate and increase in net income. While the amount of impact to your ETR will be dependent on a number of factors, companies that purchased TTCs reported an average ETR approximately three percentage points lower than the average reported by companies that did not.
In addition to quantitative returns, there are qualitative returns. Buying TTCs directly supports the development of clean energy projects, helping you have impact well beyond simply managing your tax liability.
Q
What about transaction costs?
A
Transaction costs can include fees paid to advisors and intermediaries who conduct due diligence, facilitate transactions, and provide other services. Typically, these costs are paid by the seller up to a negotiated cap. The cost of tax credit insurance, if any, is also typically paid by the seller. The cost of the buyer’s advisor is typically included in the bid price for the TTCs. The gross price the buyer pays less all such costs determines the net price realized by the seller.
Q
What are the risks involved for buyers of TTCs?
A
Buyers of TTCs need to understand the risks they face and how best to mitigate them. Common sources of risk include project risk (related to the timing of credit availability), disallowance risk (related to the amount of eligible basis), recapture risk (related to the project operation period), and creditworthiness risk (related to the strength of the seller’s guarantees or indemnities). Other eligibility and timing risks, including the FEOC rules and the accelerated deadlines under OBBB, are additional important considerations.
Smith Dierking works with buyers to help them mitigate risks at every step of the transaction process.
Q
What does it look like to complete a purchase of TTCs?
A
The process may at first seem daunting, but that’s where Smith Dierking comes in. We will guide you through each step to simplify and streamline your experience so you can confidently complete your purchase and realize the benefits of this opportunity. That’s What We Do.