On June 14, 2023, the IRS released proposed regulations within Section 6418 Transfer of Certain Credits concerning the election under the Inflation Reduction Act of 2022 (IRA) to transfer certain energy tax credits. The industry has eagerly awaited these proposed regulations as the original statute left a number of critical unanswered questions that made the much-hyped “marketplace” for tax credits difficult to implement. Some of these questions have now been answered. Below are some observations as to what the future may entail if the regulations are finalized to match the proposed form.
- Tax Insurance Will Be a Staple of the Market Place
The IRA has provided a boon for the tax insurance industry as it quickly became one of the key drivers of policies. For the uninitiated, the general goal of tax insurance is to provide liquidity to a taxpayer in the event of an adverse tax result, including defense costs. In the context of the tax credits, tax insurance has already been widely adopted by the industry to cover the risk of tax credit recapture under Section 50(a) of the code, and it is not unusual for insurance to cover the tax consequences arising from tax equity financing a transaction from soup to nuts.
The proposed regulations made clear what many assumed would be the case – the risk of tax credit recapture is expressly borne by the purchaser of tax credits, and the parties are free to contract for the seller of tax credits to indemnify the purchaser against this risk. It is expected that the market will quickly coalesce to provide a synthetic indemnity for this recapture risk and pricing for tax credits will build in the cost of obtaining this buy-side tax insurance policy, which would include premiums, underwriting fees, and brokerage fees.