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.
3. Support: Consulting services, such as GAAP accounting and tax implications, ensure accurate financial reporting of tax credit transactions. Tax consulting is crucial for navigating the complex regulations surrounding ITCs and PTCs, while investment review services assess the potential risks and benefits of investing in these credits, providing a comprehensive understanding of the implications for investors. Need support in these services? Get to know our team.
4. Fund structure and tax treatment: The transfer of tax credits offers simplicity, avoiding the complexities of direct ownership. However, it's important to note that without direct ownership of the energy assets, there are no benefits from bonus depreciation. This contrasts with the FLIP ownership model, where direct ownership allows for such benefits. Yet, one must consider that changes in ownership within five years can trigger tax credit recapture, a risk not associated with credit transfers. This distinction is crucial for investors considering the best approach to maximize tax advantages while minimizing risks.
5. Client benefits: Investment in ITCs and PTCs offers significant tax savings, aligns with corporate sustainability goals, and allows for flexible financial planning options. For entities seeking to mitigate their tax liability while supporting renewable energy initiatives, these benefits are particularly valuable.
6. Business triggers: The renewable energy credit market is influenced by policy changes and market trends, which creates opportunities for strategic investments. In addition to reducing their tax burden while contributing to the development of renewable energy sources, companies and individuals with substantial tax liabilities find these credits particularly attractive.

Clearly, the benefits of ITCs and PTCs can be particularly valuable to organizations that are looking to promote economic growth and sustainability, reduce costs, stimulate innovation and create new opportunities for their people and their business. However, the risks of these credits are not to be taken lightly.

While the advantages of investment and production tax credits are important for promoting economic growth and sustainability, ensure your organization navigates their associated risks carefully. Contact Baker Tilly’s team to discuss how your organization can benefit from ITCs and PTCs moving forward.