4 Benefits of Purchasing a Transferable Tax Credit
Imagine if your corporation could legally reduce its federal tax liability by 10% or more without taking on complex equity risk or altering its core business operations. This is the reality in a rapidly growing market for transferable tax credits. For corporate taxpayers with federal tax liabilities, the ability to purchase transferable tax credits directly for cash has transformed tax planning from a standard administrative task into a powerful profit-driving strategy.
What benefits do a tax credit purchase offer to a buyer?
#1: Economic Savings
The primary and immediate benefit for a buyer is the discount on the purchase price paid for the credit. Because these credits are sold at a discount, often ranging from 7% to 10% off their face value, a corporate buyer can effectively pay off a dollar of federal tax liability for 90-93 cents. (For a buyer with a smaller liability, the discount received may fall into the 80s). Additionally, under current IRS rules, the financial gain realized from the discount is exempt from federal income tax, which adds to this benefit. By turning the required tax payment into an easy discount, companies can instantly lower their effective tax rate and keep more cash on hand to reinvest in their own business.
#2: Simplicity
Another benefit of a transferable credit transaction is simplicity. Prior to 2022’s Inflation Reduction Act, if a buyer wanted to partake in energy tax breaks, they had to sign up for complicated partnerships and tax equity deals that locked them up for 5+ years and forced them to be involved with ownership of the project. With a transferable credit, the exchange is a straightforward cash purchase directly to the seller. It’s basically a quick, one-time transaction that can be closed in a few months, giving a buyer the full tax write-off without tying them down.
#3: Cash Flow and Planning
Another perk is the boost this gives to a buyer’s cash flow and planning. Because a buyer purchases these credits to match the tax they owe, it takes the guesswork out of the tax strategy. Even better, a buyer doesn’t have to wait until tax season to realize the benefits. The minute a buyer commits to purchasing the credits, they can slash quarterly estimated payments right then and there, and a buyer can keep more cash in their bank account throughout the year. Payments can also be structured to occur on each quarterly funding. Instead of writing a check to the IRS on the quarterly payment date, a buyer would forgo the IRS payment and pay the seller, but at the discounted price, offering essentially an infinite IRR. Basically, a buyer turns a mandatory check to the IRS into immediate savings for their own bottom line.
#4: Strategic Advantages
Beyond financial metrics, buying transferable credits gives companies a strategic edge in the business landscape. Purchasing credits allows corporate buyers to support renewable energy projects (such as wind, solar, or clean fuel facilities) as part of their climate or sustainability strategy without needing to own or manage project operations. It is a shortcut to hitting environmental goals as a buyer reaps the public relations credit without any operational headache. A standard tax payment has become a tool for winning over green-minded customers and investors.
Ultimately, transferable tax credits are a major upgrade for corporate tax planning. They let any smart company turn a mandatory tax bill into quick cash savings and easy green bragging rights, all without any long-term headaches. If you owe federal taxes, jumping into this market is one of the simplest ways to save money while helping fund clean energy.
For more information, reach out to Analyst Colton Hellwig at colton@mickco.com or 605-977-4873 ext. 7, or one of our team members if you are interested in learning more about tax credit transfers.
Your organization should seek independent legal, tax, and accounting advice as part of this process. Mickelson & Company is not providing legal or accounting services.