The Role of Tax Credit Insurance in Mitigating Risk for Tax Credit Transfers 

The Inflation Reduction Act of 2022 brought on a massive change in federal tax law, allowing energy tax credits to be sold. This opened new opportunities for renewable energy developers to raise capital, specifically those unable to utilize tax credits themselves. The ability to buy and sell tax credits does provide financial flexibility, but it also has its risks; therefore, making tax credit insurance a key tool for potential losses. 

Tax credit transactions involve buyers and sellers. These buyers are usually large corporations with significant tax liabilities, whereas some sellers have robust balance sheets and can offer indemnities. On the other hand, other sellers may be unable to back up their guarantees due to a lack of financial capacity. To fill the gap and provide security for buyers, tax credit insurance steps in. It covers risks such as IRS disallowance of credits, disputes over project liability, and compliance with prevailing wage requirements.  

Tax credit insurance is tailored exactly to your needs and can address multiple risks. This includes:  

• Eligibility disputes, to ensure that tax credits claimed align with IRS regulations.  
• Energy community incentives, in case of any potential miscalculations in qualification for bonus credits.  
• Regulatory compliance, to protect against penalties for failing to meet wage and apprentice standards.  
• Recapture risk. This provides coverage in case tax credits are clawed back due to project transfers or destruction. 

You’re probably wondering whether tax credit insurance is for the buyer or the seller. Well, it can be procured by both, but with important distinctions. For example, a policy procured by the seller may not always completely protect the buyer, since gaps can arise if the seller’s representations are inaccurate. A buyer-procured insurance is the one that offers stronger protection, as it ensures that misrepresentations by the seller do not result in any financial losses for the buyer.  

However, even with tax credit insurance, due diligence is still important. As a buyer, you must verify the credibility of sellers, analyze policy exclusions, and ensure that your coverage is adequate for potential penalties, interest, and legal fees. Getting in touch with expert insurance brokers and tax advisors can help you navigate the complex landscape and secure the right protection. 

With the renewable energy market constantly evolving, tax credit insurance will continue to play a crucial role in reducing financial risk and stimulating confidence in tax credit transactions. But careful planning and due diligence always come first in making informed and secure investments.  

For expert advice, contact Shayne Bevilacqua at Professional Liability Insurance Group.  
Call or text us at +1 (877) PLIG – 123, that’s (877) 754 – 4123.