The pain of missed opportunity can leave as gaping a wound as a CFO learning that they just overpaid their corporate federal taxes. Now imagine that the overpayment totaled 10%, and the opportunity lost is the annual compounded return on 10% fewer taxes every year beginning in 2021 and continuing until 2033. That pain was undoubtedly felt alongside the collective bewilderment of the majority of CFOs in the summer of 2024 upon discovering that this hypothetical setup was, in fact, real, and that their company contributed to over $100 billion dollars in corporate and HNW (high-net-worth) overpayment in 2023 taxes.
This August will mark two years since the passage of the groundbreaking Inflation Reduction Act, also known as the IRA — the other type of IRA — the one that puts money back into the pockets of U.S. businesses and individuals now. Not only are its cash benefits prolific and easily attainable, the legislation catalyzed the largest coast-to-coast investment campaign into energy infrastructure and domestic manufacturing in 80 years. There’s a lot about the IRA to get excited about, yet according to a Washington Post-University of Maryland poll released last year, only one in five Americans said they knew a decent amount about the IRA, and many of those individuals who failed to understand the monumental shift in the U.S. tax code were the exact professionals tasked with providing leadership and advisory services to those who were most likely to qualify.
From the perspective of the national interest, the IRA is the largest public works and infrastructure spending bill since FDR. Some call it the “Green New Deal,” echoing the immense efforts to stimulate the economy and address long-term challenges in America during the historic 1933 to 1939 period. The IRA instituted a remarkable stimulus plan to build approximately $300 to $600 billion in clean energy and mobility infrastructure from 2023 to 2033. Its genius is in the details of how the money for development expenses is sourced, not through inflationary money-printing and bond sales, but rather through investment tax credits (ITCs), or transferrable deductions that construction companies and developers can sell to businesses and individuals in exchange for cold, hard cash.
How the IRA benefits business
Due to a knowledge deficit on the IRA among the country’s CFOs, CPAs and tax attorneys, most eligible businesses and individuals across the U.S. totally missed the starting gun when the IRS issued its initial guidance in June 2023, and more recently in April and June 2024. However, with the government’s direction having been disseminated, received and now battle-tested for a year, it’s ready for prime-time by the nation’s tax accounts to take advantage.
Providing tax credits for projects and purchases related to clean energy has been going on for several years in the U.S, but not like this. The IRA offers unprecedented incentives for taxpayers, companies and the renewable energy sector, including tax transferability. For the first time ever, renewable energy tax credits are transferable or sellable. Investors who missed this update, which occurred in June of last year, overpaid on their federal taxes by 10 to 25%. But they can take action to not miss the window next year.
In essence, tax equity and tax credits take a company’s or individual’s tax liability and turn it into an income-generating asset. This is a large federal tax exemption for U.S. accounts. It also means that HNIs (high net-worth individuals) and C Corps with passivity activity income now have a choice to either pay the full amount they owe the IRS — and lose all that money — or buy tax credits under the Inflation Reduction Act. Doing this enables taxpayers to meet their obligation to the IRS, while financing clean energy and green investments in the US.
It’s important to note that in terms of the market size of these tax credits, there is currently far more demand than supply. While investors are pulling tax credits for the current year, they’re also signing multi-year commitments out of fear that there will be a lack of credits when they need them in the future.
I’m seeing a massive amount of searches conducted by C Corps and HNIs seeking 2023 credits to offset their current tax bill. The problem is those credits no longer exist because they’ve all been consumed. In other words, if you want to get in, get in now. The risk reduction alone is worth the reward.
How the IRA benefits renewable energy developers
Because tax credits are now transferable, storage developers and renewable energy developers or installers can sell tax credits in peer-to-peer transactions on the open market for cash. While this can only be one time from the developer to the buyer (taxpayer), who has tax demand, the Inflation Reduction Act guarantees a 10-year horizon for this program to promote stability and certainty.
Additionally, renewable energy project developers can see some returns for their investors faster than credits generated from other environmental markets, such as carbon credits. To sweeten things, tax refunds on financing projects can take as little or long a time as it takes to file an income tax return with the IRS, as opposed to the 12 months to two years it can take to generate and sell carbon credits.
For the renewable energy developers, the IRS will provide 30 to 60% of the value of a new project in tax credits. Without tax credits developers typically need to raise money for their projects from a variety of different sources, often private equity funds, which is an expensive cost of capital.
How the IRA benefits taxpayers (buyers)
Now here’s what’s in it for taxpayers. Buyers can offset up to 75% of their federal tax liability per year. Not only that, they can buy credits during the current tax year, and carry them back three years. This means they can include an exemption in their tax filing and file a revised filing for previous years.
Those are some of the highlights of how tax credits can be optimized. As for tax equity, think of it as tax credits turbocharged, as they amplify and maximize the total return to an investor for taking the same amount of risk because the return includes the depreciation at the federal and state level, as well as cash flows from the project. In 2023, there was $25 billion of clean energy tax equity done in the U.S. The biggest advantage of tax equity is that it can lead to nearly a double return.
There are even more opportunities where these came from, and there’s still time to take advantage of the Inflation Reduction Act. When tax credits are optimized properly, what’s good for taxpayers is good for the planet.
