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The tax credit sale market should ramp up quickly now that the Internal Revenue Service has issued guidance on such sales. The guidance, issued on June 14, will require revisiting some tax credit sale transactions where documents have already been signed. The Inflation Reduction Act (IRA) allowed companies to sell tax credits to other companies for cash. Such sales became possible on January 1, 2023.
Some transactions have already closed but have not yet been funded. Most sales have been in the 90¢ to 93¢ range per dollar of the tax credit, but prices have been creeping up, and many people expect them to settle around 95¢ or 96¢. Prices vary by technology, the seller’s creditworthiness, and the time between when the purchase price must be paid and when the buyer can apply the tax credit to offset a tax liability to the government. The shorter the period between cash payment and use, the more the buyer should pay.
The new guidance is in the form of proposed regulations. The IRS will take comments through August 14. The proposed regulations will require buyers to do careful diligence before buying tax credits. They make the tax credit buyer responsible if the tax credits are later disallowed or reduced by the IRS on audit. After an audit adjustment, the IRS will collect 120% of the disallowed tax credits from the buyer as a penalty.
By doing careful diligence, the buyer can avoid the penalty but not the obligation to repay the disallowed tax credit amount. Although the IRS did not say which party — the tax credit seller or buyer — will have to pay the interest and any other penalties on the back tax adjustment, the buyer should expect to have to pay those as well. It is the buyer’s tax return that will get audited. Interest and other penalties can add significantly to the back taxes owed.
The proposed regulations also require buyers to repay the US Treasury in cases where investment tax credits and so-called section 45Q credits for capturing carbon dioxide emissions are recaptured — for example, because a wind or solar project on which an investment credit is claimed suffers a casualty or is sold by the owner within five years after it is placed in service or where captured CO2 that has been sequestered leaks from underground within the first three years after sequestration.
Buyers will demand creditworthy indemnities if the tax credits they purchase are denied later on audit. The indemnities will have to compensate the buyer for the lost money it paid for the tax credits and the amount it must pay the US Treasury.
