Exploring the many benefits of investment and production tax credits

Over the last 18 months, the Inflation Reduction Act (IRA) has had a significant and far-reaching impact on the development of renewable energy in the United States and, subsequently, throughout the world.

In particular, investment tax credits (ITCs) and production tax credits (PTCs) are two notable areas that have been dramatically expanded and extended by the IRA, underlining their importance in addressing climate change and promoting clean energy. Both types of credits can now be sold directly to investors without the complexity of ownership structures.

A tax credit directly reduces your tax bill dollar-for-dollar, as opposed to deductions, which lower your taxable income. Providing a substantial financial benefit is an effective incentive for certain investments or actions, such as renewable energy.

Exploring the intricacies of investment and production tax credits reveals their multifaceted nature, including their return-on-investment potential, risks, professional support, tax treatment based on fund structure, client advantages, and key business considerations.

1. Return on investment: Purchasing ITCs and PTCs at a discounted rate offers a notable return on investment (ROI) by significantly reducing federal tax liability, often exceeding the initial purchase cost. The ROI is further enhanced by the flexibility to carry back the credits for refunds or carry them forward, providing substantial financial benefits over a prolonged period. The ROI from the tax credit purchase is as simple as acquiring the tax credits for $0.90 per $1.00 of credits equates to 11% ROI.
2. Risks: ITCs face a recapture risk, which is triggered if the qualifying energy asset is sold, disposed of, or ceases operation within five years that leads to a potential repayment of the credit (decreasing by 20% annually). Insurance products are available to mitigate risk. In contrast, PTCs carry no such risk as they are based on actual energy production. However, both credits are subject to market and policy fluctuations, which can impact their value and availability. Market volatility and policy changes present another layer of risk, as shifts in government incentives or renewable energy market dynamics can alter the value and applicability of these credits.