Key insights
- The market for transferable clean energy credits is expected to remain a powerful cash strategy for developers and investors, even with changes made under the One Big Beautiful Bill Act (OBBBA).
- OBBBA preserved the framework for credit transferability while introducing new conditions, such as restrictions on transfers to certain foreign entities and faster deadlines for wind and solar projects.
- Sections 45X and 45Z, which support clean energy manufacturing and clean fuel production, are becoming popular because they offer steady credits, flexibility, and lower risks.
- Over the last 12 months, CLA has worked on close to 60 credit transactions, offering insight into how the transfer market operates.
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Tax credit transferability remains a powerful cash planning strategy for developers and investors. Introduced by the Inflation Reduction Act of 2022 (IRA), project owners can sell their tax clean energy credits for cash — making it easier to access capital and plan strategically.
While the One Big Beautiful Bill Act (OBBBA) rolled back certain energy incentives, tax credit transferability remains largely intact, creating a clear runway to transact credits for the next several years and keeping this powerful tax planning strategy firmly in play.
What is tax credit transferability?
Enacted under the IRA, Section 6418 of the Internal Revenue Code allows entities that generate certain federal clean energy tax credits to sell them to unrelated parties for cash. This is especially beneficial for developers who lack sufficient tax liabilities to use the credits themselves. It’s also an attractive alternative to historical tax equity structures that typically lock investors into partnerships for a number of years.
On the buy side of the transfer market, taxpaying C corporations can’t seem to get enough of the savings afforded by transferable credits. Due to the way Section 6418 was drafted, individuals with passive activity tax liabilities can also benefit from credit purchases; however, C corporation buyers have dominated the market.
Paying less than face value for a credit (sometimes as much as 15%), and not being taxed on the savings, seems like one of those too-good-to-be-true opportunities. But these savings are real, and corporations have flocked to the transfer market to lighten their tax bills and improve cash flow.
What the OBBBA changed — and didn’t change
Despite early drafts of the OBBBA proposing rollbacks to tax credit transferability, the final legislation preserved Section 6418’s framework, albeit with some restrictions.
- Most notably, credits now cannot be transferred to prohibited foreign entities, aligning with broader national security and trade policy goals.
- Additionally, the OBBBA chipped away at some of the underlying credits eligible for transfer. The most significant of these changes relates to wind and solar projects, which have been highly transacted in the market.
- These projects are now facing a loss of eligibility due to the OBBBA’s accelerated termination date. Namely, projects that begin construction after July 4, 2026, must now be placed in service by the end of 2027 to qualify for investment and production tax credits under Sections 48E and 45Y, respectively. Projects that start before this date are not subject to the accelerated deadline but must still be placed in service within four years after the year construction begins to meet the continuity safe harbor.
- In conjunction with the accelerated termination for wind and solar credits, the IRS further tightened compliance and documentation standards, particularly around the beginning of construction safe harbor provisions.
These changes will force many wind and solar developers to accelerate project plans to preserve tax credit eligibility.
Other key aspects of energy tax credit opportunities could impact your business. Watch our webinar on tax credit transferability.
Manufacturing credits are becoming buyer favorites
Two of the newly created credits under the IRA — Sections 45X and 45Z — directly benefit certain clean energy manufacturing activities. They’re also becoming favorites among buyers since they can generate a steady stream of credits, can be transacted in tranches on a quarterly basis, and are viewed as less risky than other credits because they’re generally not subject to recapture.
Section 45X: The tax code’s ultimate manufacturing incentive
Effective January 1, 2023, the Section 45X Advanced Manufacturing Production Credit has been a golden goose of sorts for clean energy manufacturers in the United States.
Applicable to a wide range of clean energy components — from solar equipment to critical minerals — Section 45X has developed a unique position in the market due to the large credits it can generate and the flexibility it can give buyers from a transferability perspective.
Additionally, it’s safer risk profile in the eyes of many buyers has often led to higher market pricing when compared to other transferable credits.
The OBBBA left Section 45X largely intact, although it did accelerate the phaseout of wind energy components. On the flipside, a new qualified mineral was added: metallurgical coal.
Perhaps the biggest change relates to the new prohibited foreign entity rules effective for tax years beginning after July 4, 2025. The new provisions will require many manufacturers to evaluate their supply chains to avoid tripping the “material assistance” rules, although further guidance is needed to define their meaning and scope.
Section 45Z: A new era for clean fuel tax credits
Effective January 1, 2025, Section 45Z introduced the Clean Fuel Production Credit, an incentive aimed at decarbonizing the transportation sector. The credit rewards producers of transportation fuels — both sustainable aviation fuel (SAF) and non-SAF fuels — based on their lifecycle greenhouse gas emissions.
The OBBBA extended Section 45Z through December 31, 2029, originally slated for termination at the end of 2027 under the IRA.
Section 45Z consolidates and replaces several pre-IRA fuel credits and is expected to bring a surge of new production tax credits to the marketplace. Moreover, it’s expected to gain popularity with buyers due to its flexibility in terms of timing and cash flows.
How CLA can help with tax credit transactions
Despite some rollbacks of the IRA, the retention of Section 6418 in the OBBBA fosters tax credit monetization opportunities for both renewable energy developers and corporate taxpayers.
CLA’s renewable energy practice facilitates tax credit transactions for renewable energy developers, corporate taxpayers, and high-wealth individuals. With nearly 60 credit transactions completed in the last 12 months, our team understands the ins and outs of the transfer market and how to seamlessly execute credit purchases.
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