Transferring renewable energy tax credits under the Inflation Reduction Act (IRA) can offer significant financial advantages, but it’s a process filled with potential pitfalls, especially for sellers. In this post, we’ll explore the three primary areas where things can go wrong—timing, documentation, and recapture mitigation—and what sellers must do to avoid costly mistakes. At the end, we’ll also touch on the buyers’ role in verifying compliance and protecting themselves.

Seller Responsibilities: Avoid the Pitfalls

 

Timing Pitfalls

Seller responsibilities:

• Transfer Election Deadline: Sellers must make the election to transfer tax credits by the due date of their tax return, including any extensions. Missing this deadline disqualifies the transfer, and the election becomes irrevocable once made. Sellers cannot make this election on an amended return.
• Automatic Extension: Sellers can take advantage of a six-month automatic extension to finalize the election if they need more time to ensure the transfer is properly executed .

Consequences:  Failing to meet the election deadline results in the seller being unable to transfer the credits for that tax year, which could mean missing out on significant financial opportunities. Since the election is irrevocable, sellers cannot reverse their decision once the deadline has passed .

Documentation Pitfalls

Seller responsibilities:

• Pre-Filing Registration: Before transferring any credits, sellers must complete the IRS pre-filing registration. This step ensures the project and credits are registered and eligible for transfer. Without this, the transaction is invalid .
• Accurate Project Documentation: Sellers are responsible for documenting all key project details, such as construction and in-service dates. The documentation must prove the project’s eligibility under IRS guidelines .
• Transfer Election Statement: Sellers must also provide a transfer election statement that includes all the necessary details about the credit transfer. This document can take the form of a partnership agreement or another formal agreement, but it must include essential representations from both parties to be valid .
• Base and Bonus Credits: If the project involves both base and bonus credits (e.g., domestic content bonuses), sellers must transfer them together. Improper documentation of bonus credits can result in their disallowance .

Consequences:  Inaccurate or incomplete documentation can lead to disallowed credits or an invalidated transfer. If pre-filing registration or transfer election statements are not properly completed, the IRS can reject the credits, resulting in financial losses for the seller. Moreover, sellers may face legal disputes if buyers suffer losses due to faulty documentation  .

Recapture Mitigation Pitfalls

Seller responsibilities:

• Maintain Project Eligibility: Sellers must ensure that the project remains eligible for the credits after they’ve been transferred. If the project becomes ineligible, the IRS may recapture all or a portion of the credits.The resulting liability initially goes to the Buyer, but our purchase agreements also always indemnify the Buyers.
• Notification of Buyers: If there’s any risk of recapture, sellers are required to notify buyers in a timely manner. Sellers should keep buyers informed if the project’s eligibility changes to mitigate recapture risks .
• Partnership and S Corporation Rules: In partnerships and S corporations, special recapture rules apply. Partners or shareholders remain liable for recapture, even if their interest in the project changes, meaning they could be held accountable if project eligibility shifts .

Consequences:  Failing to notify the buyer about potential recapture risks can result in significant financial penalties and legal liabilities. The seller’s credibility and ability to engage in future credit transfers may also suffer if recapture occurs due to negligence in managing project eligibility  .

 

Buyer Responsibilities: Verification and Indemnification

 

Buyers must verify seller compliance

While sellers bear most of the responsibility for ensuring the credits are eligible, buyers must perform due diligence to verify that the seller has met all necessary requirements. This includes confirming that the seller has completed the IRS pre-filing registration, filed the election to transfer credits on time, and provided accurate project documentation.

Indemnification Agreements

Buyers should also protect themselves by negotiating indemnification agreements. These agreements ensure that the seller will compensate the buyer if recapture occurs due to a change in the project’s eligibility .

Failure to verify these details could leave buyers exposed to disallowed credits or recapture liabilities, resulting in significant financial consequences. Proper verification and indemnification provide protection and help mitigate these risks.

How Armagh Capital Can Help

Armagh offers full-service brokerage solutions for renewable energy tax credits, guiding buyer and seller clients through every step of the transfer process. From ensuring accurate documentation and completing IRS pre-filing registration to managing recapture risks, Armagh’s expert team handles the details to ensure a smooth, compliant transaction. Our personalized approach minimizes client risk while maximizing financial benefits through tailored advisory and secure credit transfers.

Brokerage Services

Armagh leverages our deep expertise in tax credits and large network of both buyers and sellers to facilitate smooth tax credit transactions. We work with corporate sellers, real estate developers, and renewable energy project owners to market and monetize their tax credits, returning cash quickly to our clients. Simultaneously, we connect buyers—corporations, financial institutions, CPA firms, and tax advisors—with high-value credits. Our established relationships and expertise ensure that both sellers and buyers benefit from compliant, efficient, and secure transactions.

Compliance and Documentation

Armagh ensures seamless tax credit transfers by handling all essential compliance and documentation tasks. We manage the Transfer Election Statement, required for both buyer and seller tax returns, oversee the crucial IRS pre-filing registration process, and ensure commercial property insurance on the project remains in place. By preparing and submitting all paperwork on time, we provide full compliance with IRS regulations, minimizing the risk of errors, delays, or disqualified credits.

Risk Management

Armagh offers robust risk management services to safeguard clients during tax credit transfers. We assist in crafting indemnification clauses, protecting buyers and sellers from unforeseen risks, such as recapture events triggered by project ineligibility. By addressing both regulatory and contractual risks, Armagh ensures that transactions proceed securely, mitigating financial risks and providing peace of mind for all parties involved in the credit transfer process.

Market Insights

Armagh monitors the latest developments in the tax credit market, providing clients with up-to-date information on regulatory changes, market trends, and strategic opportunities for maximizing tax benefits.

For a personalized consultation on how Armagh Capital can help you navigate the complexities of renewable energy tax credits and avoid pitfalls, contact us today.