The rise of the ESG framework and growing consumer concern over climate change have made sustainability increasingly important across industries. But with the government incentivizing green initiatives through various channels, including energy tax credits, sustainability is no longer just about your financial institution’s performance. There’s also the potential for new investment opportunities.
The Inflation Reduction Act (IRA), which was passed in August 2022, increased federal funding by $400 billion to combat climate change and help create sustainable energy. Understanding the nuances of these credits, especially their transferability, can open new avenues for financial institutions to gain revenue and alternative investments.
Understanding energy tax credits
At their core, energy tax credits minimize tax liabilities for those who invest in renewable technologies.
There are several energy tax credits that can benefit financial institutions in urban and rural areas, including solar and wind credits, new clean vehicle credits and alternative fuel vehicle refueling property credits.
But there are also opportunities outside of generating energy credits directly.
Energy credit transferability
One of the most important changes the IRA made was to the transferability of energy credits. Transferability allows a taxpayer to sell their potential energy credits to an unrelated third party for cash.
Final regulations have not yet been issued on IRA tax credit transferability. However, there are proposed regulations that give guidance on how simplified this process will be.
According to IRS FAQs, the process will be as follows:
- Identify an arrangement with an unrelated third party to purchase eligible credits for cash.
- Once the credit is eligible for use, the seller will provide an eligible credit registration number and any other necessary information to the buyer.
- The buyer and seller will complete a transfer election statement.
- The buyer files a tax return claiming the credit in the tax year the credit is eligible for use.
For financial institutions, this opens new opportunities for investing in clean energy.
The business case for transferability
Clean energy projects generally require large capital investments. The entities initiating these projects may lack the required funding and the taxable income necessary to use associated energy tax credits.
Transferability provides financial institutions with the potential to benefit from energy tax credits without having to produce energy or install energy property, but instead provide financing to entities doing just that.
In pivoting away from the need for complex tax equity structures to transfer credits, the ability to buy and sell energy credits for cash has simplified the transferability process. It also allows financial institutions to provide financing solutions and capitalize on tax credit value while enhancing a diversified portfolio.
How Wipfli can help
For financial institutions, the evolving landscape of energy tax credits is a growing opportunity. But navigating the specific requirements of energy credits and transferability can be complex.
If you’re interested in pursuing energy credits, reach out to Wipfli. Our dedicated tax team can help you develop the right strategy to reduce your tax liability while enhancing your green footprint.
Sign up for more financial institution content in your inbox or continue reading: