TL/DR –
The Inflation Reduction Act of 2022 allows for the transfer of tax credits for clean energy projects, incentivizing developers and investors to get involved. The law created two new credit delivery mechanisms, elective pay and transferability, enabling a range of entities to utilize the clean energy tax credits. Startup company Crux Climate aims to leverage this by connecting buyers and developers to finance clean energy projects and facilitating transfers of the tax credits, and has already raised $8.85 million across two seed funding rounds.
The Inflation Reduction Act and Clean Energy Tax Credits
The Inflation Reduction Act is facilitating tax credits transfers for clean energy projects, encouraging developers, investors, and their tax advisors to participate. The law enacted in 2022 introduced two new credit delivery mechanisms – elective pay and transferability. These mechanisms enable various entities, including local governments, nonprofits, and U.S. territories, to benefit from clean energy tax credits. Proposed guidance on these mechanisms was issued by the IRS and the Treasury in June.
Startup Leveraging Credit Delivery Mechanisms
Startup Crux Climate aims to utilize these mechanisms by linking buyers and developers to finance clean energy projects and facilitating tax credit transfers between them. The company has raised $8.85 million from investors such as Lowercarbon, Overture, QED, Ardent Venture Partners, Orsted, LS Power, Hartree, and Canapi.
Competitive Landscape
Crux Climate faces competition from firms like Basis Climate and Evergrow. These companies are capitalizing on the opportunities provided by the Inflation Reduction Act to buy and sell renewable energy tax credits.
Market Growth Expectations
Companies anticipate rapid growth in the clean energy tax credit business. The annual volume is predicted to reach $85 billion by 2031, a significant portion of the total corporate taxes paid by U.S. corporations, estimated at $527 billion. As this new asset class emerges, tax advisors are expected to play a vital role.
Kinds of Credits and their Utility
Various federal credits associated with clean electricity, solar, wind, battery storage, charging infrastructure, hydrogen, advanced manufacturing, carbon capture, and direct air capture can be sold under the Inflation Reduction Act. These credits facilitate development in multiple areas, encouraging the construction of renewable energy and decarbonization infrastructure. Tax credits can be sold by developers to investors, which is often necessary for developers due to their long-term payment structure.
Role of Tax Advisors
Intermediaries like Crux Climate and tax advisors will be crucial in the developing market for clean energy tax credits. Tax advisors will be instrumental in guiding corporations, providing due diligence on projects before investors buy tax credits and helping clients source supply.
Longevity of Tax Credits
The tax credits are expected to last for a significant period, providing an incentive for corporations to invest in renewable energy infrastructure. There is increasing support for clean energy tax breaks across the political spectrum, and the benefits of tax credits for rural developments are being recognized.
Advising Clients on Clean Energy Tax Credits
Tax professionals can guide different types of clients to consider the clean energy tax credits available now. They can help clients achieve savings on federal taxes, invest in energy infrastructure and sustainability, and understand the viability of strategies in this new market.
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