Direct Pay and the Right to Transfer Tax Credits in the Inflation Reduction Act

HeatSpring hosts a free course titled Getting Solar for Nonprofits, Government, and Non-Taxpayers. In the recorded live session, HeatSpring instructor Chris Lord asks Jeffrey Lesk of New Partners Community Solar to explain the new direct pay option and the right to transfer tax credits within the Inflation Reduction Act. Tune into the video to learn more or read the transcript below.

Chris:  There is a direct pay and there’s also a right to sell tax credits to a third party. 

Jeffrey: Right.

Chris: I’m imagining that the sale of a tax credit to a third party is going to see some kind of a discount. You’re selling only the tax credits, so no depreciation going with it. I’m going to guess 85-90%, depending on credit quality and a host of other issues. That a fair explanation of how the sale? 

Jeffrey: Yes. 

Chris: Okay. But then against that, for our nonprofits, our non-tax payers, it makes a lot more sense for them to file with Treasury and get a direct payment, because there there’s no discount.

So, for example, if a buyer wants the tax credit for 85 cents on the dollar, you’re going to make 15 more cents by waiting for Treasury to send you the check. 

Jeffrey: That’s exactly right. So I think the provisions are there largely because a huge segment of a market out there – governmental entities and nonprofit – are doing solar. And yet they’ve got to go through this complicated tax credit equity process to raise funds on the capital market. And there’s nothing wrong with it, but it is time consuming and it’s complicated. It’s expensive. 

But the direct pay, particularly for governmental entities, is an ability for them to get capital for doing these worthy projects.

But the transferability provision is a way of saying you don’t have to go through this complicated process. You don’t have to find an equity investor. You don’t have to go through a tax credit syndication. 

It’s essentially done as a kind of a refund – the direct pay. You’re treated as if you paid a tax in the amount of the credit, and then you get a refund of that as if you got a tax refund.

So again, you’ve got a timing issue. You’ve got to complete it and do the form and get it back in the way of a refund. That should be a hundred cents on the dollar. 

If you’re doing it through transferability and just selling it for cash, you’re going to have the same pricing concerns that you’d have if you did an equity syndication and you allocated those benefits through an LLC or a limited partnership.

So, yeah, I’m not sure what that discount will be. The market will speak, but it won’t be a hundred cents on the dollar.