What are Transferable Tax Credits?

What Are Transferable Tax Credits

Transferable Tax Credits (also known as Transferable Renewable Energy Tax Credits, or “TTCs”) are financial instruments that taxpayers who earn TTCs can sell to an unrelated third party for cash. The buyer can then use the purchased TTCs to reduce their own income tax liability on a dollar-for-dollar basis.

Pre IRA

Prior to the enactment of the Inflation Reduction Act of 2022 (IRA), only an owner of a renewable energy project was able to use the resulting tax credits. The only way for third parties to access renewable energy tax credits was to enter a lease or partnership with the project developer through co-ownership tax equity structures, which can be complex, long-term, costly, and difficult to manage. As a result, the pre-IRA market was dominated by a small number of large financial institutions with the ability to take on such complex tax equity structures.

IRA

The enactment of the IRA allows buyers to purchase transferable renewable energy tax credits directly from the sponsor/developer to offset their federal tax liability. The IRA was intended to broaden capital access, reduce transaction friction, and speed deployment of energy infrastructure. The importance of TTCs is growing due to an increased energy demand in the US (crypto, AI, cloud, reshoring) and manufacturing incentives that have produced a multibillion-dollar annual supply of credits. Enactment of the IRA opened direct transferability, which allows entrance to corporate buyers outside of traditional tax equity. This increased demand for TTCs improves market liquidity and tax credit pricing.

Benefits of TTCs vs Tax Equity Structures Post-IRA

1. TTCs eliminate the need for complex tax equity structures, reducing the time and resources necessary to complete a transaction.
2. The simplified direct acquisition process reduces the need for ongoing asset management and financial reporting.
3. TTCs have a more favorable and simplified accounting treatment which grants access to companies that previously did not have access to renewable energy projects due to complex GAAP account treatment under traditional tax equity schemes.
4. Buyers under TTC transfers are not subject to asset financial performance risks as they are not investing true equity into a project.

Additional Financial Benefits of TTCs

1. Permanent cash tax benefits due to discounted purchase price resulting in an effective tax rate reduction.
2. Potential for significant cash deferral benefits from reduced quarterly estimated payments.

12 TTCs

There are currently 12 transferable renewable energy tax credits under the following applicable tax code sections:

ITCs and PTCs

Most transferable tax credits fall within two categories: Investment Tax Credits (ITCs) and Production Tax Credits (PTCs).

Investment Tax Credits:

One-time credits based on a percentage of a project’s upfront capital investment value when the project is placed in service (PIS).

Production Tax Credit:

Ongoing, metered credits that are generated based on the actual production and sale of qualifying products and clean energy, claimed annually over a 10-year period.

Credit percentage and Bonus Adders

ITCs

Base credit for an Investment Tax Credit (ITC) starts at 6% of the project’s qualified cost basis and can increase to 30% if all Prevailing Wage and Apprenticeship requirements are met. Projects can also qualify for bonus adders, which increase the percentage of the credit generated as we discuss below.

The IRA provides for three bonus credits or “adders” on top of the base ITC percentage:

1. Energy community bonus (10%)

• • Brownfield Sites
  • Specified Statistical Areas
  • Coal Closures
  • Nuclear facilities

2. Domestic Content bonus (10%)

Bonus for projects that meet requirements for components manufactured in the US. Applicable to §45, §45Y, §48, and §48E credits. There are two requirements for a project to qualify for the domestic content bonus:

• Iron and Steel:100% of structural steel and iron used in the project must be produced in the US.
• Manufactured Products:
  
  - IRA, for a project to qualify, a minimum percentage of the total cost of manufactured products (including components) had to be U.S.-sourced (direct labor costs not applicable). All manufacturing processes had to occur in the US.
  
  - Post-OBBBA (June 16, 2025): A manufactured product is treated as “domestically produced” if (a) the final assembly occurs in the U.S., and (b) a minimum percentage of its components (by cost) are mined, produced, or manufactured in the U.S.

3. Low-income community bonus (10-20%)

The new Clean Electricity Investment Tax Credit is an allocated tax credit that is granted to certain applicable facilities under the IRA Section 48E which replaced the previous §48 ITC starting in 2025. It grants an extra 10% or 20% bonus ITC on top of the baseline 30% credit.

To qualify for this bonus, projects must be less than 5 MW and fall into one of the following four categories:

• Located in a qualified low-income community (10% bonus).
• Located on Indian land (10% bonus).
• Part of a qualified low-income residential building project (20% bonus).
• Part of a qualified low-income economic benefit project (20% bonus).

These projects are an allocation that is not automatic. Projects must apply and be awarded allocation capacity by Treasury/DOE every year, and demand is high. Buyers should confirm allocation award letters, and compliance with low-income rules.

PTCs

Production tax credits are calculated using a rate-based formula determined by the qualifying product or energy produced and sold annually over a period of 10 years. The IRS updates §45 PTC rates each year, typically in Q2, using an inflation adjustment factor (IAF) published in the Federal Register. For 2024, the IAF was 1.9499. Rates are generally stable, but they are subject to revision.

PTCs are also subject to PWA requirements:

Projects only qualify for the full rate if they comply with the Prevailing Wage and Apprenticeship (PWA) rules. Without compliance, they remain stuck at the base rate, which is only 20% of the full value.

1. Calculation of PTC Amounts

The applicable PTC rate depends on when the project was placed in service.

         a. Before January 1, 2022

These projects are not subject to the new prevailing wage and apprenticeship rules (“PWA”). The PTC is calculated as [1.5 cents] × [IAF], rounded to the nearest 0.1 cent. In 2024, this produced $29.00/MWh for wind, closed-loop biomass, and geothermal, and $15.00/MWh for open-loop biomass, landfill gas, trash, qualified hydropower, and marine/hydrokinetic energy.

b. After December 31, 2021

For newer projects, the formula is [0.3 cents] × [IAF], rounded to the nearest 0.05 cent. If the project complies with PWA, the result is multiplied by five. In 2024, with PWA compliance, the rate was $30.00/MWh for wind, closed-loop biomass, geothermal, and solar; and $15.00/MWh for open-loop biomass, landfill gas, trash, qualified hydropower, and marine/hydrokinetic energy. For hydropower and marine/hydrokinetic projects placed in service after December 31, 2022, the same $15.00/MWh rate applied in 2024, assuming PWA compliance.

2. Energy Community Bonus

Projects located in an energy community receive a 2% increase in PTC value without PWA compliance and a 10% increase if PWA requirements are met.

3. Domestic Content Bonus

Projects meeting domestic content thresholds also receive a 2% increase if not PWA-compliant and a 10% increase if they are. For a project that satisfies PWA, the domestic content bonus can bring the effective PTC value to 40% of qualified basis.

OBBBA Changes

On July 4^th, 2025, Congress passed the One Big Beautiful Bill Act (“OBBBA”) which imposed significant changes to transferable renewable energy tax credits created by the IRA in 2022. OBBBA impacts tax credits projects beginning construction in 2025 and beyond. Placed in service restrictions affect projects not placed in operation (COD) and placed in service (PIS) by the end of 2028. Transferability is intact, but the pool of eligible projects and eligible buyers will change, diligence burdens rise, and wind/solar supply decays after 2027 unless grandfathered. Buyers can expect more credits from fuels (45Z), storage, geothermal, nuclear, and 45X manufacturing to dominate the TTC market mix.

The main changes imposed by OBBBA that affect TTCs are:

1. Keeps transferability but narrows who can buy and what qualifies: §6418 transferability survives. However, for the tech-neutral credits (45Y/48E) and several others (45Q/45X/45Z), credits may not be transferred to “specified foreign entities” (SFEs), and broader Foreign Entity of Concern (FEOC) rules can make projects ineligible if there’s prohibited ownership/influence or “material assistance” from PFEs. More KYC-style screenings of buyers and counterparties can be expected.
2. Pulls forward the sunset for wind/solar under 45Y/48E (tech-neutral PTC/ITC): Wind/solar must either begin construction by July 4, 2026, or be placed in service by Dec 31, 2027, to claim 45Y/48E. Storage and most other technologies keep the longer 2034–2036 phaseout ladder.
3. Tightens “begin construction” (BOC) for wind/solar shrinking the pipeline of projects that qualify: Notice 2025-42 now generally disallows the 5% safe harbor for wind/solar over 1.5 MW (effective Sept 2, 2025); developers must use the Physical Work Test to meet the July 4, 2026, BOC deadline. This is a real constraint on which projects will qualify for credits, and thus what can be bought in later years.
4. Adds a new, separate 10-year recapture trigger for 48E ITCs: if certain payments later give an SFE “effective control.” That is on top of the traditional 5-year ITC recapture regime. This will cause insurance and rep & warranty packages to lengthen and get pricier.
5. OBBBA did not eliminate bonus adders but heightened scrutiny (particularly around domestic content safe harbors):
   Failure to substantiate adders can cause partial disallowance and an “excessive credit transfer” penalty exposure for buyers.
   Prevailing Wage & Apprenticeship: Maintain certified payroll, apprenticeship ratios, cure procedures for failures (back wages + penalty interest).
   Domestic-content hurdles and new FEOC tests: OBBBA escalates domestic-content thresholds and adds “material assistance” supply-chain tests with penalties and an extended 6-year statute of limitations. Practically, this translates into more documentation, more supplier certificates, and more reasons a project might fail diligence.
   Energy Community / Low‑Income: Geographic or allocation proof (maps, allocation award letters).