Investing in IRA (Inflation Reduction Act) Tax Credits
Investing in IRA (Inflation Reduction Act) tax credits involves several key risks that investors need to manage:
1. Qualification Risks
- Proper Claiming: The primary risk is whether the tax credit was properly claimed by the project developers. Buyers must ensure that credits meet all qualifying criteria, such as prevailing wage and apprenticeship requirements, and that the cost basis of the project is correctly documented.
- Documentation and Third-Party Verification: Buyers should verify that the project’s cost basis is accurately documented and verified by reputable accounting or legal firms.
2. Recapture Risks
- Section 48 ITC Recapture: For Section 48 ITCs, there is a risk of recapture if the property does not remain a qualified energy facility for five years or if there is a change in ownership during this period.
- Mitigation Strategies: Buyers can mitigate this risk by ensuring proper site control, adequate property insurance, and structuring debt in a way that does not trigger recapture.
- Indemnifications and Insurance: Sellers often provide indemnifications to buyers, and tax credit insurance can serve as a further risk mitigation strategy.
3. Compliance and Audit Risks
- Complexity and Cost of Non-Compliance: The IRA’s compliance requirements are complex and subject to frequent revisions, increasing the risk of audit failures and penalties.
- Mitigation Strategies: Proactive compliance management systems can help reduce audit risk by ensuring adherence to prevailing wage, apprenticeship, and domestic content requirements.
4. Structural and Operational Risks
- Transaction Structure: While transferable tax credits reduce structural risks associated with complex tax equity partnerships, buyers still need to focus on the project’s underlying operational risks.
- Change in Law Risks: Tax credit insurance typically does not cover changes in the Internal Revenue Code or Treasury regulations, so buyers must ensure that the structure aligns with current expectations.
5. Financial Risks
- Insurance Limitations: Tax credit insurance policies have caps on payouts, which might not fully cover the costs of audit losses, including interest and legal fees.
- Discounts and Value Reductions: Investors may apply discounts to the value of tax credits to account for perceived risks, potentially reducing monetization opportunities for developers.
Overall, managing these risks through thorough due diligence, indemnifications, and tax credit insurance is crucial for investors looking to benefit from IRA tax credits.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-risks-associated-with-investing-in-ira-tax-credits/
