IRA Federal Transferable Tax Credits

John Carson: Hello, everybody. John Carson here with Armagh Capital. Many of you know us from doing the Georgia film credits Georgia historic credits. We really appreciate your business loyalty over the years. I'm just a little bit of a background about a year and a half ago, one of my friends reached out to me and said, I'd love to be able to sell some IRA credits.

And I can be honest with you. It was about a week or so after president Biden signed the inflation reduction act, I thought, wow, this is amazing because I can't tell you how many of you have reached out to myself and state tax incentives and Chrissy and others and say, this is great getting a little bit discount on our state taxes.

What do you have on our federal? Now we have a solution and we have credits available, but before we get into that too much like I said we formed Armagh Capital to really serve this market in regard to federal transferable credits. This is a growing industry and so forth, and we just felt it responsible to client service to be able to offer this as well.

And that's exactly what we're doing. I'm joined today with Allen Bradley and . Allen is an attorney with Fennimore Craig. He was with Moy White up until last week, and there was a merger between their two firms. Allen and Matt, you want to say hello real quick?

Introduce yourselves.

Allen Bradley: Sure, my name is Allen Bradley. I did a lot of work in the solar area. I met John about a year ago, and really have moved this forward. The whole, the ability to transfer credits is brand new and John is really taking advantage of that opportunity.

Matt Nodvedt: Thank you, Matt. Hey, thank you, John. Good afternoon, everyone. My name is Matt Nodvedt and I'm the senior director of alternative energy banking at Sonovus. We're about a $65 billion bank headquartered between Columbus, Georgia and Atlanta, Georgia. And this is like many of our peers. This is relatively new to us.

This is an area that we and a lot of community bank capital providers have dabbled in over the years but had never really had. A dedicated strategy in this space. So I was tapped to lead this position a couple of years ago. And just come up with a strategy. Find a, bespoke project finance solutions for our developer lenders that are active in the solar biogas battery space along with some of the more emerging technologies.

And then I also am an investor in ITCs on behalf of our bank. That's a big part of our tax abatement strategy. Working with folks like John on historic film, low income housing, tax credits, etc. Myself and many of my peers have added ITCs and PTCs into the mix. So thrilled to be here, John.

Appreciate you putting this together for everyone.

John Carson: Absolutely. Glad to. And just for reference myself and Allen, obviously in Atlanta, Matt is based in Charleston, but obviously we serve southeastern, if not nationwide markets. Let me share screen real quick.

Real quick in regard to what are the benefits? Why are we talking about these credits? First of all, obviously, there's going to be a cash savings on the federal taxes and we'll go into the, how and what have you.

But I just wanted to, Make sure your folks understand why this could benefit your clients and why people there's so much buzz talking about this. One is obviously there's a savings against federal taxes. That's the most immediate benefit when you're acquiring. Same like a film credit, same like a historic credit.

Other states have other certificated credits where a credit essentially purchased at a discount to face value, say 91 or 92 cents or something like that. The second benefit is sustainability. Many corporations care greatly about this in regard to their sustainability ratings.

Typically, I found that one group that's looking at a number of our credits that we have in inventory are U. S. subsidiaries of foreign corporations. If you have a French parent, an Italian parent company of a U. S. subsidiary, it's going to be a C corporation, and they're going to be very much concerned with sustainability on their profile.

And then third recognition in public documents. I've had some clients reach out to me and say, Hey, we'd love to buy some, but can we list the pictures or disclose this in our annual reports in our website? So forth. And most of our sponsors are delighted to do that. Quite frankly, it helps with their marketing as well.

So just quick overview. A little over, 18, 20 months ago, President Biden signed the Inflation Reduction Act in 2022. And what this did is created, among other things the ability to transfer certain tax credits, which is completely new to my knowledge studying the tax code for 30 years.

Whereas no longer was it necessary to be as part of a tax equity traditional structure, meaning a partnership flip or a sale leaseback. You're literally buying a credit. You're buying an intangible asset rather than a business interest And it is quite common in states, obviously in Georgia, film, historic, other states such as Connecticut, Pennsylvania, Illinois, Indiana have historic credits, film credits, but this is really the first time that I know of that the federal government is doing transferable credits on a federal level that's covered in new code section called 6418 in regard to transfer of certain tax credits. And what this is clearly designed to do is provide cash incentives for the development of solar energy, wind, all types of clean and renewable energy and producing those materials as well as installation of them. Matt Allen, anything I forgot there?

Matt Nodvedt: Yeah, I think it cannot be understated what a shot in the arm to the industry IRA was. This has been codified to apply for renewable energy projects since 2006.

But transferability, of course, again, takes away, we no longer need to have the cumbersome, expensive, overly diligent traditional tax equity partnerships. This, is an easier to understand, easier to underwrite transfer credit, but it also expanded eligibility to additional technology, like biogas is a big one or, you could have landfill gas to electric conversion. It was previously limited to electrical production projects, but now you've got gas production, you've got battery storage, you've got a handful of new technologies that the IRA has opened the doors to.

Very good.

Allen Bradley: I think just to expand on Matt's comments and simply that the transferability really opens up the market to a much broader universe of people that can benefit from the tax credits as compared to before the transferability.

John Carson: I think I'll highlight on that note, Allen, in regard to transferability versus traditional tax equity, where you have a partnership flip, a sponsor that's putting in, 150, 200 megawatts of solar would probably do a partnership flip because they get a step up in basis.

Having said that there's quite a bit of transaction costs. in regard to that, at least probably a quarter million, $300,000 worth of consultants, attorney's [00:07:00] fees, accountants, what have you, when you have transferability, you typically just have a due diligence report and other reports that you would have regardless.

And you literally are papering, you're transacting our credit from one party to another without a K1 or any type of allocation, what have you. Moving on to the next slide. This these credits apply for a number of different items and as well as new credits. I'm not going to go through all of them.

You see them basically right there. Many of you will recognize the investment tax credit section 48. Some of you have heard quite a bit in regard to clean hydrogen production. That's a 45 V credit. The alternative fuel refueling property. That's basically your EV charging infrastructure.

There's not just EV, but it's also hydrogen cell infrastructure and things like that, but it's mostly, I wouldn't say all, but EV charging infrastructure is the bulk of it. They're qualifying advanced energy project. That's a lot of I hope I don't speak too much out of turn.

The qualified advanced energy project plus the advanced manufacturing production. Those are things that, for example, Q cells here in Georgia would qualify for in regard to credits awarded for solar production and advanced energy. Allen, do I have that? I have that correct, right? Yes. Yeah.

And then as far as the initial rules for transferability, it's honestly, if you've bought film credits from us in the past, , works a lot the same in regard to transferability. Only a one-time transfer is allowed. Credits are required to be paid for in cash. However what's slightly different is any discount that you achieve on the credits is not taxable.

So if you have a client that has $100,000 state liability and you buy 100,000 credits from us, at say 95 cents or 90 cents or what have you, that 5 or $10,000 spread that they're earning is, as taxable as a Schedule D item on next year's return, depending on when the current return is.

And when that 5 or $10,000 gain is triggered that is actually not taxable under the IRA. In addition to that amounts received by our sponsors for the credit. So if they sell the credits at 90 cents on the dollar, that 90 cents per credit is not taxable either. So it's clearly meant to really put a lot of steam forward in regard to incentivizing these projects.

I will say that we'll go to this in regard to the risk and mitigate against their on. But a 20 percent penalty could be applied if excess credits are transferred. In the case of let's say there was investment tax credits that were transferred and then all of a sudden a tornado comes through southwestern United States.

A number of those credits could be recaptured. But there could also be a penalty if there was deemed to be some sort of a fraud or not due diligence or what have you. And those are the things that we cover in this presentation. Moving along key points for buyers just real quick in regard to eligibility.

I would love for this to be eligible for individuals, but just we're operating very conservatively here as it's written in the rules for section 6418 transferability from treasury as of, I think, Allen, I think it was June 20th of last year, thereabouts, and those will get to be finalized. But as of right now, treasury is enforcing section 469, which means.

The passive activity rules are applying and so we're really only marketing these to C Corporations, taxpayers with passive income liabilities such as family wealth offices, certain real estate investors and so forth. I would love for it to be open up to individuals. I don't see that happening I've written a letter to treasury on behalf of to charitable organizations But as of right now, we're operating very conservatively that this is going to be applied to C corporations and others that meet the passive activity rules

Allen?

Allen Bradley: Yeah, but I think it's important to emphasize that the credits are available to privately held C corporations, so long as the privately held C corporation has income from its day to day activities. And that, opens that up quite a bit as compared to the situation before transferability.

John Carson: Huge, absolutely. In regard to timing what the treasury has stipulated is that these tax credits must be purchased by before the seller files their tax return and before the buyer files their tax return for a particular year. So we have just a few 2023 credits reigning in the market as of right now.

It would be have to be transacted from a entity that has not filed its 2023 final return. So for C corporations, that would be October 15th of this year, as well as sold to a purchaser that has not filed their return, also October 15th of this year. And as far as credit usage, this does apply and should be equally noted in regard to the 75 percent of a tax year's liability.

Now, as you can see in the next bullet, there is a generous carry back and carry forward, but these credits can only be used up to 75 percent of a tax year's liability, much like you see with other C corporation credits . Yeah. And the carry back is, I think this is going to be huge. Now, many people have asked me, Is Treasury going to allow for penalty abatement on with the credits on corporate returns much the same way Georgia Department of Revenue allows for penalty underpayment, penalty abatement.

With using credits like a film or historic credits on a Georgia return. I don't know the answer to that. Allen might know the answer. Matt may know, but I don't know the answer to that yet. I imagine it's going to be either subject to further the final regulations that are supposed to come out very soon or or just matter of practice of the IRS.

But clearly using the credits, buying the credits on spot, following a return and following amended return one or two years back is going to be a great IRR return. And then the third point there is that the buyer CPA or the tax advisor, we need to attach two items to the return. We'll cover that in just a minute.

One's an IRS form 3800, that's just business, general business credits. And then there's a transfer election statement. That's called for in the Inflation Reduction Act, and this has about six or seven items. It's basically, here's the buyer, here's the seller here's the consideration paid, here's the unique asset identification number, so forth.

I don't,Allenan, I don't believe, based on my research, I don't believe that's a formal document. It's really more attached like an appendix to one of the forms within the tax return that I've seen.

Allen Bradley: All right. Yes.

John Carson: Got it. Further points for buyers.

One thing that I'm really gonna impress upon folks is these are not they are a direct transferable credit. They don't go through a K1. They don't go through a partnership or a sale, but at least back. However, they're not exactly certificated. They're registered with IRS approves their creation based on documents and so forth.

But I think if buyer, and this goes back to my KPMG days, I think a buyer would be it is prudent to do due diligence on this. And that's what we enable in our share files to go through the due diligence documents to make sure an asset was placed in service, that it's operational, that there's a verification from the developer or sponsor, that the prevailing wage and apprenticeship requirements are met.

That was a key item of the Inflation Reduction Act, as well as confirmation that bonus credits and adders are included in the credits. A lot of this would be handled by two items. One is, I would call it a due diligence report. Some people call it a cost segregation report. And it's almost, on the other side, if you think of a Georgia film credit, it's almost like a CPA comfort letter.

Or at least in the old terminology, a CPA comfort letter where someone other than a broker, other than a sponsor, but somebody independent goes through and they calculate the number of credits say under section 6418 under section 45V or section 48. Our analysis establishes that X credits are generated.

And what we do on our side is our service is we register that asset and the number of credits generated with the Treasury. In regard to purchase terms again the credits must be purchased in cash that is specifically in the statute. The buyer and seller cannot be related.

In other words, you can't have someone at 51 percent ownership of both. They're trying to transfer the credits. There is a difference between production tax credits and investment tax credits. And I'll cover investment tax credits first. That's basically where someone will go in and put in a $9 million solar facility and at 30 percent of vesting schedule vesting for the credits are going to get 2.7 million credits, right? And those are all generated up front. Production credits are a little bit different. You see that with advanced manufacturing, you see it with hydrogen particularly or what's coming online in regard to hydrogen, and that is, the tax credit is not awarded upfront. It's awarded as the clean energy is produced. What is interesting about the PTCs is they are not recapturable. They are, they're good as gold, if you will. The ITCs, I think, are very solid and reliable, but it does require a little bit more buyer due diligence to do. And then last item is that the credits cannot be resold.

That's also similar to the Georgia film credits. Other tax attributes, again, really making it a lot of incentive to do these investments and take advantage of these discounts. The cash amounts that are paid for the credits it's not deductible obviously to the buyer, but any spread earned is not taxable income. So if you have a taxpayer that owes $1,000,000 corporate tax on their return and they buy for example, 750,000 credits at 90 cents. That gain of 10 percent or $75,000 is not taxable to the corporation. Allen, Matt, anything I'm forgetting there?

Matt Nodvedt: I think you're good.

I think I would just add on the diligence side of things. I think it always makes sense just to have a general understanding of, the underlying project, right? You're concerned about buying a tax credit. That's the thing that you want. But where the funds are going very much matters.

I think you certainly want to have some understanding of the developers experience and successfully completing these projects, whether or not they have an EPc. Contractor or if they're vertically integrated. The timing of when you're actually entering into this agreement with the developer.

Generally, and in most deals I see, whether I'm lending on them or investing directly in them, we'll have a purchase sale agreement before the project even breaks ground. You certainly wanna do your diligence on, the underlying project, the economics, its ability to exist as a going concern to continue operating. If the project shuts down that can create a recapture event.

If there's debt at the project level with transferability you may be competing with project where you weren't necessarily on a true tax equity structure. What does that project look like? What's the bank's ability to forebear their rights?

And, because again, a foreclosure event, that's a ownership. change, that can trigger a recapture event. You certainly want to know. Yeah, the cost seg is very important. I would add, legal opinion makes sense. Just have, an attorney provide some comfort that yes, everything is as it appears this, all laws are being followed.. This should be eligible. And again, we may get into it in a moment, but there's, there's some other mitigants here for some of these risks, but your diligence, you really want to understand the project. Does it have its interconnection certificate? That's a big one right now, especially in places like Texas and California.

Some projects are waiting 2- 3 years and interconnection keys. Interconnection is just its capacity to plug into the grid and have a delivery channel for the power it's producing. Has that been approved? If not, when is that expected? Cause you can't really get placed in service without that.

There are projects out there that are sitting built, ready to roll, but not plugged in. So that's a that's a big one as well. And then basic stuff, just, permitting site control, does the developer own the property? Are they leasing it? What are the terms of the lease? On the project economics, you want to at least be familiar enough with whether or not this is a contracted sale of energy over 10- 20 years via power purchase agreement or an offtake agreement in the case of gas.

And then or is this, is this being sold? On the open market spot price on a on a merchant basis, energy prices do fluctuate in real time, and that can very much impact the economics and viability of a project. So you just wanna have some basic diligence understanding of the project and its ability to operate. as a going concern for five years because don't know if we mentioned this yet five years is your window for recapture risk. Yes, you've claimed the credit projects placed in service 2023, you've claimed it in 2024, but 2027 rolls around and there's a foreclosure or the project fails, or there's a significant enough interruption that they haven't insured against that can very much create a recapture event.

So you want to make sure you have a good understanding of where your funds are actually being invested.

John Carson: That's a really good point in regard to the five years. We have several in our inventory where a project was placed in service, one of them was November 30th of 2023.

So the PIS or the place in service date is November 30th. It's going to have to stay in place until November 30th of 2028. And like I said earlier in my example, if there was a tornado to come through or a very bad storm that would disrupt the solar installation in late 2026, presumably there would be two years of non compliance within that five year window, and there would be a clawback.

for some of those credits. And that's why in our data rooms, we make sure that there is a certificate of insurance and that's updated and so forth. Absolutely. And I will

Matt Nodvedt: add just to provide a little bit of comfort. The IRS, they're somewhat agreeable.

here. There are allowances for shutdowns for maintenance shutdowns for force majeure events. As long as there's a plan to get the asset up and running, it generally should not create a recapture event. But, what they say versus what the guidance says, those could be two very different stories.

And as I understand it, I don't think this is really written into the guidance anywhere. But as I understand it, I've been told this by enough people in the space to where I write wrong or indifferent. I believe it. But the the hurdle for, the project has to produce energy, right?

Thinking about I TCs and PTCs. For example, project has to produce energy. But, you may have a project that's proforma'd it at 100 megawatts of daily power production. That doesn't mean that's what the IRS expects to see. I think the bar for going concern and power production is absurdly low.

It might be a single megawatt hour. So there are allowances, there's flexibility for interruptions for a project that is not performing as expected again. Now, if there's project debt that you're competing with in a foreclosure situation, that can very much be an issue.

But if there's not, if the bank's forborn, forbeared their rights against yours, that you should be okay. And if the developers built the whole thing on bAllence sheet and there's no debt that's one less risk you got to be concerned about.

John Carson: Agreed. Agreed. I went ahead in advance to the next slide because we're talking so much about the risk and how we mitigate those.

And the two biggest risks, just as Matt noted, one is on the recapture. If something is not in place for like you see there on the left and five years or if it goes out of service or And not coming back online that's a potential risk for recapture. And then the disallowance, that's really more in regard to inflated tax basis calculations.

The second one is particularly why we really stress and each of our credits comes with a due diligence or cost segregation report, and. I will just say, I'll just explain this at a early level because I had to learn this 18 months ago, but a cost segregation report

-many of you are aware that in regard to manufacturing facilities, but this is something that's done also for solar developments, other renewable types of energy. Projects where costs are segregated in regard to what is depreciable and what time frames or what have you. And when a consultant goes out and does that, they are also able to, assuming that they're taking a look at 45V section 48 or 45X or what have you, they're also able to determine how many credits on an independent calculation, how many credits are being generated, whether investment tax credits, ITCs or PTCs for a particular tax year. Second item, I think I mentioned that in regard to property insurance, that is absolutely key and crucial.

You wanna make sure your sponsor is insuring the project. That's just good early on due diligence. One thing that we ask for just to protect our buyers. is indemnification. Many of you have bought film credits for us and we appreciate it. That's something that we insist on from the film production [00:24:00] company.

It's something we insist on from the historic project developer. But indemnification is absolutely key because of if I, if our seller is not willing to sign up to indemnify our buyers, your clients, then we're simply not going to work with them. They need to be able to stand by it with the warranties and guarantees and so forth.

And I think that's that's something that we practice as a policy. And I think it's just common sense. And then also other due diligence documents that we keep in our ShareFile data rooms. Due diligence items in regard to prevailing wage, apprenticeship, place and service, verification permits, licenses. There's a number of projects that have engineering reports that are good to take a look at that.

And I know it sounds also less technical, but you want to make sure you have a very robust sponsor doing the due diligence on the entity and its information and so forth. Allen, any more points on that? I think Matt and I have covered a lot there.

Allen Bradley: I think it's just important to recognize that one of the values of our Armagh is creating the data room and doing that initial due diligence instead of setting up the stage for more due diligence as wanted by the buyer.

John Carson: And that's what we strive for is just to be open and transparent, but also secure at the same time with our files . Matt.

Matt Nodvedt: Yeah, I would just echo that - the importance of a partner in this space to help you navigate this and the due diligence.

I've now we as a banker now, eight or nine ITC and PTC investments. and even now I would not go this alone. There's a lot to understand, a lot to know, a lot to cover to make sure that when you are audited after claiming this credit, that the IRS agrees with you, that this is eligible.

I do want to add on the on the disallowance piece, I will say if it's a comfort, I don't know that we're seeing as much, risk of disallowance for, the eligible basis calculations with transfer credits as we would in more traditional tax equity structures where these are investment tax credits.

These were based on the amount of the investment. And for a transfer credit, that's simple enough, right? It's the credits, what you're buying for true tax equity. You may be buying an asset, you may be buying ownership in a partnership and have a bunch of ancillary benefits like depreciation, some preferred returns, etcetera.

You have much more of a basis step up, as you guys know, and you'll need to have an appraisal and you'll need to have some additional confirmatory diligence that the credit basis hasn't been over inflated. But I think in these cases, between a cost seg and a legal opinion, I think you're pretty well covered.

One other mitigant that I would add here is that a recapture insurance does exist. The Marshes of the world, the Aeons of the world there's a handful of brokers that do it, that cover you against recapture risk from the IRS there's things that certainly doesn't cover contractual default of the sponsor, if they fail to facilitate the transfer any misrepresentations or outright fraud from the sponsor. But otherwise, there is there are insurance products available to protects you from the risk of recapture out there. Now, big question is who pays for that? Sometimes it's the buyer, sometimes it's the seller.

But and again, the transfer market is still relatively new. This really only went into effect 16- 17 months ago and the market pretty much sat on the sidelines for the first six months of that waiting for additional guidance to come out from the treasury and from the IRS.

Still a very new market, but again, insurance is available out there from reputable carriers.

John Carson: And on that we will be offering we have five projects in our pipeline, for which we're likely to put tax credit insurance on them because of the size. It's one of those things where tax credit insurers such as Alliant, Aeon, Marsh, they don't want to write tax credit insurance for one of our projects that say, 2 million credits or a million credits or something, it's just not economical for them.

And even if they can make it work, it might add six or 7 cents to the transaction. And that's not gonna make it work for either the purchaser or the seller. But I think when you put some more zeros behind it, I think it would be a good idea to at least recommend to a client to take a look at tax credit insurance or that option.

Particularly on ITC. Now again for production tax credits, those are based on production of the clean energy, whatever type it is, and they would not be subject to recapture.

Moving on. Okay, how are these credits transferred and reported? So many of you bought state certificated credits from us. We go in through the Georgia Tax Center account, we transfer from seller to buyer, and it's put into your GTC. How does this work for federal? I think it was right around Christmas time.

My wife was annoyed how much I was on the website at Christmas, but the IRS created a portal for transferring these credits. And it's a 2023 IRA credit registration or 2024 IRA credit trans registration. And you can see that's a little snippet of the website and what we do on our side to serving both the seller and the buyer:

we register the asset, the IRS, I didn't put it in here, but the IRS awards a unique asset identification number for say a solar rooftop installation or a commercial industrial installation or an EV charging infrastructure, they'll assign a unique asset identification number.

And that is used to say this asset generated a million credits or two or five million credits or what have you. And from that point, we register the asset. We upload engineering documents, permits, pictures, things like that in the IRS in a few weeks, like I noted there on the bottom left, they'll approve the asset, hopefully, and almost always they do.

And then, I would say what's interesting is that to talk about who all is doing this and what have you, I think Allen Bradley can speak to this a little bit more based on some tax notes articles. But 98 percent or so of the assets that are being registered via this portal, which you see right there, 98 percent of them are they're going to be electing a transfer election subsequent or at the time or subsequent to place in service date.

So this is becoming very popular to do. And the IRS is and getting their. their resources up to speed. Allen, did you have anything on that?

Allen Bradley: Yeah, I think one of the reasons for this and what John mentioned is the contrast between transferability and what is called elective pay under section 6417 designed mainly for non profits and governments, largely non profits.

And the problem with the 6417 election for nonprofits is that the nonprofit cannot make the election until the project is placed in service. While Matt mentioned the sale agreements for transferability are often done long before the project is placed in service, and so on the supply side, giving the credit, one locks the credit in long before the place and service date and allows for some financing of that project before the place and service date.

John Carson: So if I could, Allen, if I could just frame the issue, so section 6418 is created in the IRA and that has to do with transfer of credits from for profit entities.

Allen Bradley: Correct.

John Carson: Section 6417 has to do with transfer of credits generated by non profit entities. So think of the example of a let's say a Walmart puts in a whole bunch of solar panels and they, for whatever reason, a Walmart chooses to transfer those credits. That would be under section 64 18. Let's say down the street there's a Goodwill store or a church.

That's obviously a nonprofit, or at least a non-income tax paying entity. They would be able to transfer their credits under Section 6417 for nonprofit entities.

Allen Bradley: Hey, John actually is called elective pay since the IRS is the party that is monetizing the credit under the non profit regime, the 6417. Correct. Elective pay.

John Carson: That's correct. Now, I will say that they have to wait a year. It's my understanding they have to wait a, they basically have to their tax return to the IRS and then wait for that elective pay to be attached to that return the following year.

Correct?

Allen Bradley: Correct. And the, certainly, it's great to receive the proceeds of that credit, Obviously the credit does nothing to finance the solar project. Because the proceeds are received only long after the project is turned on.

John Carson: And then lastly, just in regard to mechanics.

Matt Nodvedt: Sure. One one important distinction to make on that previous slide is that registration of, with the IRS via that portal in no way implies that the credits are eligible or exist.

Again these credits really don't exist. The IRS outside of this registration portal, which is new IRS. Really doesn't know about these credits until they show up on the filers tax return in the year following the place in service date. So this is a very important tool for, for tracking for accountability for fraud protection.

But just I just want to be clear that, this in no way implies that the credit itself is eligible.

John Carson: Exactly, and that goes back to the due diligence process to make sure that what we're providing for will be in regard to an independent report, cost segregation, certificate of insurance, other substantial documents such as permitting, licensing, entity information and so forth.

That's all crucial. And then one last item in regard to not just transferred, but how are they recorded. These there were these credits under the IRA would be, regardless of technology, would be reported under form 3800 under a general business credit. And a buyer CPA or advisor will need to file this 3800 for which Armagh will provide the information in regard to the number of credits purchased.

But in addition to that, we'll also provide information, if not the transfer election statement itself, which is required under the Inflation Reduction Act. And that basically says, this is the buyer, this is the seller, this is the asset identification number, these are the number of credits transferred this is the election statement for this particular year. That is not a particular IRS form. I wish it was for compliance purposes. But as Allen noted, it's more like an appendix, for IRS guidance in regard to making sure that all of this is vetted and documented. I can't stress that enough. Allen, anything more there or Matt?

Allen Bradley: I think you covered it pretty well, John.

That's great.

John Carson: Now, I will say that the seller our client on the other side of the transaction is going to be responsible for [00:35:00] form 3468 or other various forms. And that's basically for the generation of the credit by the seller. So again, in that example where there's a $10 million development, Or maybe a $9 million development of solar at 30%.

That's 2.7 million credits. The seller would be filing 3468 on the seller's tax return, but the buyer would not need to file that. All they would file would be the 3800, which includes the general business credit, including the transfer credits coming in from the portal, as well as the transfer election statement.

So in summary basically it's a whole new market and it's a whole new product in a whole new market. Whereas we have a transferable federal credit within the renewable energy credit space. Yes, there were many renewable energy projects going on, but those are more so a reserve at a utility scale level that could be done via partnership flips and it was almost solar and wind. Now we're looking at hydrogen, EV charging infrastructure. We're looking, and one thing that Armagh is doing is we do a lot of distributed generation. And that is much more difficult to do via partnership flip when you're only dealing with one, two, four, five million credits at a time, as opposed to 100, 200, 300 million credits.

Some of the benefits here, obviously the cash savings. To discount on the to cash on the tax liabilities. And again, that spread is not taxed. Second, you're looking at sustainability recognition, which is important to some corporations. And then third, public recognition in regard to annual reports, disclosures, announcements, social media even.

Again I wear my due diligence hat from KPMG years ago. The risk can be mitigated with due diligence, documentation, and indemnification. I just want stress that this is not a commodity. This is not a commodity whatsoever. Due diligence has to be done, but once it is, that helps protect your buyer along with documentation and indemnification.

John Carson: If not, tax credit insurance as well. So that's really all I had today.

If you want to use your raise your hand button on zoom, happy to do that. Matt or Allen, any parting thoughts?

Matt Nodvedt: I'll give another second for questions, but I've got a couple other comments I can add. Sure. I think it's, I think it's important for us to just remember or have some knowledge on, why this is even a thing.

When we talk about the energy transition that's occurring in America today, which is my job is to help my bank capitalize on it. But we're seeing a pretty, pretty stout resurgence of energy demand after a pretty flat decade. In the southeast and our geography, this is driven by, certainly by economic and population growth.

But then things like electrification of vehicles and data centers, especially those that support AI infrastructure. Those are the black swans that we hadn't adequately contemplated. A good story out of Georgia actually is you guys commissioned the first new nuclear reactors in the U. S. in over 40 years at Vogel, right? Generating about 2.2 gigawatts that have cost over $30 billion and 30 some odd years of development. But there's one data center that I'm aware of under construction in Alpharetta that's expected to draw 1.1 gigawatts of power. So there goes half the new capacity. And the state, by the way, has another 10 or so of these AI data centers in development.

So now we got another 50 years of oil. We've got plenty of coal. But at the end of the day the stone be came to an end not for a lack of stones, came to an end because we found better materials. So that's what's occurring today. $30 billion of solar. investment should produce 10 to 15 times the energy that Vogel produces, and it could be brought to market in 2 to 3 years.

And additionally, we're at the point where the technology is reliable enough in the case of solar, at least to expect a 40 to 50 year useful life. And it's advanced additionally to where the levelized cost to produce electrons, even on unsubsidized basis with no IRA, ITCs, PTCs it's comparable or cheaper than nuclear, coal fired or power projects. So what's going on in Georgia right now? It's indicative of what's going on across the U.S. Every three years. I don't know if you saw the story. Southern Company goes before the Power Commission to present its resource plan right where they say, here's what we need to meet the state's energy consumption needs.

Right in November of last year, they made an unscheduled revision to their I. R. P. And revise their estimate, which was originally 400 megawatts additional power needed to 6600 megawatts. That's an 11 fold increase. Now, Georgia Power, subsidiary of Southern Company it's got about 40 gigawatts, I want to say, of electrical generating capacity. And that's when all assets are online and operating and producing energy. But on January 24 of just this past year, a few months ago, Georgia Power reported peak load of about 38.7 gigawatts, dangerously close to blackout condition. So we need a lot more energy.

We need it quickly. This is how we get there. This is why the IRA was passed to be that shot in the arm. And I will say, the tax equity markets traditionally been about a $20 billion market. Five, five or six years ago, gosh, Bank of America and Chase were probably half of the market, but when this went into effect in 2023 we know of about $4 billion of transfer agreements that were inked that year, which is probably indicative of a 7 to $8 billion 2023. Long terms, about $30ish billion dollars in tax incentives consumed last year. Long term estimate is for about half a trillion of ITCs and PTCs to be consumed between today and 2031. I think the market expects the total market to peak at around $80 billion that year.

So no, it's a tremendous market. And look, ESG aspirations are good. Decarbonization ambitions are good. Being good stewards of our planet is a good thing, but this is a market opportunity, a tremendous one that both sides of the political aisle can agree on, and it's something that everybody is after.

Matt Nodvedt: So everybody's on similar calls this year, learning about this space, doing the research. Some folks were sitting on the sidelines, but the market is hot. It's expected to heat up. And right now, There's more demand for ITCs than there is supply. Supply is rapidly catching up, but still, far outpaced by demand.

So It's a very exciting time to be doing what I do in a very exciting time for all of us to be speaking about this. John, I appreciate you including me and putting this together for everyone. Thank you, Matt.

John Carson: A few questions that have come up. I want to verify this with the attorney.

Can individuals with passive income purchase these credits and use them on a return? My inclination is to say yes, because of they meet the passive activity rules. Allen, can you verify, can individuals with passive income tax liabilities utilize these credits?

Allen Bradley: Yes, if the individual has passive income, they can utilize the passive credits against that passive income.

We just need to make sure that, the individual or the buyer needs to make sure they have the appetite the passive income, to be able to use the credits.

John Carson: Got it. Okay. Barry Klein at [00:42:00] Carr Riggs asked if the 2023 credits are purchased in '24 calendar year. As long as it's for 2023 tax year. Can that be done and filed?

And yes, I confirm as long as the seller has not filed their 1120. As long as the buyer's not filed their tax return, then yes. Those credits from 2023 can be transacted in '24 up until the date of the due date of the 2023 return and that due date includes extensions Barry. And everyone said that would be up to we'll see corporate 10, 20 October 15th of 2024.

Let's see. Barry also at CRA asked what is the typical spread on these? What we're seeing is somewhere In the low 90s on these usually so if somebody wanted to buy, say 100,000 or 500,000 credits, it depends on, probably the time of year as this market matures, to Matt's point, as well as the number of credits available as you get closer to the tax deadline.

Similar, and I think many people have seen this, unfortunately very few certificated film and historic credits on the market. So the price goes up. I imagine what's going to happen in late probably Q3 at the latest there will be fewer and fewer credits on the market and the price is going to go up as a result, as people are prepared to finalize their 1120s for the prior year.

In other words, in September, October, finalizing their 1120s. For 2023 tax year. So a typical spread against probably anywhere from six to 9% pricing at say 91 to 94 cents. Maybe a little bit less. It depends on, how willing the seller is to move on the credits. Steve asked how many? What do we expect in regard to ranges of transaction sizes?

I'm trying to do a minimum of 100,000 credits. I really don't want to go below that because of how much due diligence involved. Same way. We try to stay over 10,000 film credits per transaction because of the amount of paperwork involved. But not to mention with this, you have data rooms to set up access.

Transfer election statements, so forth, and you don't want to do that for a small amount. Having said that, I did get a request for 50,000 credits, and I'm happy to accommodate that on a first time basis. Let's see, individuals. How many ITCs do we have available for 2023 and '24? I'd say for 2023 I look at it two ways.

What's current and what's pipeline current, I would say we have about 18 million with a pipeline of about another 25 million for '23. But that's not in just yet it's still coming in based on our sellers. For '24 I think our pipeline is going to be massive and it's more or less a piggyback of what Matt just said.

People were sitting on the sidelines waiting to see how this was going to play out in regard to the regulations on transferability. Imagine how many film credits would have been created in tax year '23 before there was a Georgia tax center, or we knew who could use them. It would have limited the availability.

I think for '24, we're probably going to have at least 50 million credits pretty soon with a pipeline of somewhere of 250 to 350 million credits for 2024, if not quite a bit more. It's one of those things where it's very lumpy, right? So if you get one project with 125 million credits or one project with 80 million credits, it obviously moves the numbers quite a bit.

John Caprol, How aware are taxpayers that it was important day for anyone to consider to do an energy project? Let me just read this for Allen and Matt. There's a question from John Caprol. How aware are taxpayers that December 31st, '24 is an important day for anyone considering doing an energy project. The credits will go forward, but not all, so this date will be important on those projects that do not qualify after '24.

Allen, can you take a stab at answering that?

Allen Bradley: So I wasn't exactly clear, John. The projects in '24, the, that place and service date is important to achieve by 12/31/24 for the project to generate credits for 2024.

John Carson: The place and service date dictates the tax year of the credits now, like Allen said, under 6418, which is the transferability of credits from private entities.

That can be done before the place in service date, but the place in serve date is what determines the tax year in the same way the Georgia Department of Revenue letter date. That's what determines a tax year for a film credit. The place and service date for renewable energy installation is what determines the tax year here.

Allen, just one more time.

One person has asked just to confirm interest dividends and capital gains are considered passive income and can these credits can be used against those resulting tax liabilities, correct?

Allen Bradley: No, oftentimes interest and dividends are considered what's known as portfolio income. You have three buckets of income, right?

Active, portfolio, and passive. And so that recurring income, such as interest and dividends, is typically portfolio income and so cannot be used for the credits since they're subject to 4629.

John Carson: Got it. Got it. Okay. We've got a couple of minutes left before the top. Before the 1 o'clock hour

John Caprol we're going to unmute you in just a second here. John, can you hear us? Mhm. Hi, John. Hey, go ahead. Can you? Can you restate your question? I don't think I did it justice in regard to. Yes,

John Caprol: No, that was fine. That was the idea. A number of these benefits and again this is something that it's a great opportunity for everyone involved. Some of these credits are going to end at the end of this year. Now, what I mean by end placed in service date but also if a project is started and enough work is done by the end of the year, by 12/31/24, it can also be claimed in '25. That's something that's not well known yet.

The other thing is that the credits are going to shift to a different type of regime. Some of the credits are going to fall off. And 48 cappy, for instance, the successor is really going to be about clean energy clean electricity rather than renewable energy. And so there are some morphing things that will happen next year.

Something that, that really needs to probably be start being discussed now because there's still time to get projects shovel ready and begun by the end of the year.

John Carson: Got it. Allen, Matt, anything on that?

Matt Nodvedt: I guess part of the question would be news to me. I wanna make sure we're not confusing. In a traditional tax equity structure, I, as the investor, I may have to go ahead and put in 20 percent of my investment at mechanical completion, which certainly occurs, prior to commercial operation, construction, completion placed in service, the placed in service date being the accounting term for when the asset can begin depreciating, right?

Not necessarily when it's commercially operating and generating revenue. But as far as I know, and again I've only been doing this a couple of years placed in service date is the definitive date for when the when the credit can't be claimed. So yeah, a project that's placed in service.

Whether it's 1 1/1/2023 or 12/31/2023, you've got until, what, October 15th, 2024, to claim the credit or, utilize it for a three year look back or a carry forward. But yeah, that would be news to me. But that, that said, this market is rapidly evolving. There's new guidance out there, gosh, every couple of weeks.

And so you really do need to stay on your toes because it's a, it's very much a living, breathing piece of policy.

John Carson: Thank you, Matt. You see the last slide is our contact information. I'm happy to provide Allen's email address and Matt's email address and their contact information as well.

Allen, Matt, it was a pleasure having you on today. And it's a pleasure having everyone on here because as much as we have this these various credits available. I really wanted to have a time of really exploring this issue and education, because I think that's really the key. That as well as the due diligence and the risk mitigants. I think it's just absolutely key here. Many people are understanding the, the film credit and the historic credit and other types of certificated credits. Like Matt said, this is a whole new entity, a whole new product. And I hope this has been helpful.

This this session is going to be recorded and it'll be up on the Armagh Capital website. And I just appreciate everybody being on today. Matt, Allen, any parting thoughts?

Matt Nodvedt: Just can't ever overstate how new this is. I'd be surprised if anybody's actually claimed one of these. We did probably the first transfer credit in the country last year.

But for 2024, again, it's a lot of new guidance. And so we'll see. We inked that deal. We haven't claimed it yet, obviously, but very new very new world for all of us. Understood. Allen?

Allen Bradley: Yeah, I just again want to reiterate that, the IRA transferability really expands the universe for people that can take advantage of the credits.

John Carson: Very much very much that's all the time we have today. Matt, I appreciate it. Allen, appreciate it. Everyone have a blessed day. Thank you so much.