The pain of missed opportunities can be as much of a gaping wound as a CFO being told he just overpaid his federal business taxes. Now imagine that the overpayment was 10%, and the lost opportunity is the annual compound return on 10% less taxes every year beginning in 2021 and continuing through 2033. That pain was undoubtedly felt alongside the collective bewilderment of the majority of CFOs in the summer of 2024 when they discovered that this hypothetical setup was in fact real and that their company contributed more than $100 billion to overpaid corporate and wealthy individuals in taxes in 2023.
This August will mark the two-year anniversary of the passage of the landmark Inflation Reduction Act, also known as the IRA – the other type of IRA – the one that is now putting money back into the pockets of American corporations and individuals. Not only are its cash benefits fruitful and easily achievable, the legislation has also catalyzed the largest coast-to-coast investment campaign in energy infrastructure and domestic manufacturing in 80 years. There’s a lot to be excited about about the IRA, but according to a Washington Post-University of Maryland Survey published last year, only one in five Americans said they knew a fair amount about the IRA, and many of those individuals who failed to understand the monumental shift in the U.S. tax code were the very professionals charged with providing leadership and counseling services to those who were most likely to qualify.
From a national interest perspective, the IRA is the largest public works and infrastructure spending bill since FDR. Some are calling it the “Green New Deal,” a reflection of the massive efforts to stimulate the economy and address America’s long-term challenges during the historic period from 1933 to 1939. The IRA created a remarkable stimulus plan to to build $300 to $600 billion in clean energy and mobility infrastructure between 2023 and 2033. The genius is in the details of how the money for development costs is obtained, and not through inflationary money printing and bond sales. , but rather through investment tax credits (ITCs), or transferable 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 lack of knowledge about the IRA among the nation’s CFOs, CPAs, and tax attorneys, most eligible companies and individuals in the U.S. missed the starting gun completely when the IRS issued its initial guidance in June 2023, and more most recently in April and June 2024. However, now that the government’s guidelines have been circulated, received and put to the test for a year, the country’s tax bills are poised to benefit.
Providing tax credits for clean energy projects and purchases has been going on in the US for several years, but not like this. The IRA offers unprecedented incentives for taxpayers, businesses and the renewable energy sector, including tax portability. For the first time, renewable energy tax credits are transferable or sellable. Investors who missed this June update last year may have overpaid their federal taxes by 10 to 25%. But they can take action to avoid missing the window next year.
Essentially, tax shares and tax credits take a company’s or individual’s tax liability and turn it into an income-producing asset. This is a great federal tax exemption for US accounts. It also means that HNIs (high net-worth individuals) and C Corps with passivity income now have the choice of either paying the full amount they owe to the IRS – and losing all that money – or purchasing tax credits under the Inflation Reduction Act. By doing so, taxpayers can meet their obligations to the IRS while financing clean energy and green investments in the US.
It is important to note that given the market size of these tax credits, there is currently much more demand than supply. As investors collect tax credits for the current year, they are also signing multi-year commitments out of fear that there will be a shortage of credits when they need them in the future.
I’m seeing a huge amount of searches being done by C Corps and HNIs looking for 2023 credits to offset their current tax bill. The problem is that those credits no longer exist because they have all been used up. 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 happen once from the developer to the buyer (taxpayer) who has tax demand, the Inflation Reduction Act guarantees a ten-year horizon for this program to promote stability and certainty.
Furthermore, developers of renewable energy projects can see some return for their investors more quickly than the credits generated from other environmental markets, such as carbon credits. To make matters even sweeter, tax refunds on financing projects can last as long as or as long as it takes to file an income tax return with the IRS, as opposed to the twelve months to two years it takes to get carbon credits generate and sell.
For renewable energy developers, the IRS will provide 30 to 60% of the value of a new project in the form of tax credits. Without tax credits, developers typically must raise money for their projects from a variety of different sources, often private equity funds, which entails expensive capital costs.
How the IRA Benefits Taxpayers (Buyers).
This is what’s in it for the taxpayers. Buyers can offset up to 75% of their federal tax liability each year. Not only that, they can purchase credits during the current tax year and carry them back for three years. This means they can include an exemption on their tax returns and file a revised return for previous years.
These are some of the highlights of how tax credits can be optimized. As for tax equity, think of them as turbocharged tax credits because they increase and maximize the total return to an investor for taking the same risk, because the return includes the federal and state depreciation as well as the cash flows from the project. By 2023, $25 billion in taxpayer dollars were spent on clean energy in the US. The biggest advantage of tax law is that it can lead to almost double returns.
There are even more possibilities 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 the taxpayer is also good for the planet.