Considerations for Buyers of Section 45Z Transferable Tax Credits
The Inflation Reduction Act introduced market transferability for numerous clean energy incentives, and the Section 45Z Clean Fuel Production Credit is now among the most actively traded in the market. Available for production beginning on Jan. 1, 2025, and extended through the end of 2029, the §45Z credit rewards the production of transportation fuels with verified carbon intensity scores lower than their fossil fuel counter parts. For corporate taxpayers, it presents an efficient and repeatable mechanism to reduce cash tax liabilities while achieving a measurable rate of return.
Timing Is Crucial
Most §45Z credits will trade in a range of $0.90-$0.94 per dollar of face value, depending on credit size, indemnity strength, timing of cash flows, and seller quality. Because these credits are transferable general business credits under §38, they can offset up to 75% of a taxpayer’s regular income tax liability, carried back three years or carried forward 22 years.
Timing the purchase around estimated payment dates is central to the return on the transaction. Buyers that close a transaction around a quarterly payment date can substitute the credit for cash tax outlays, realizing the savings immediately.
If there is an executed term sheet in place, buyers can also underpay an estimated payment ahead of closing on the transaction as the term sheet represents the intent to purchase the credit. This delayed use of cash results in an incalculable IRR.
Technical Diligence Is Essential for Transactional Certainty
Unlike investment tax credits (ITCs), §45Z production credits carry no recapture risk. The credit is earned upon verified fuel production, significantly reducing long-term compliance risk. However, technical diligence remains essential. Key documentation includes:
Eligibility Documentation: Independent verification of carbon intensity (CI) scores, prevailing wage compliance, qualified sale, and other eligibility requirements in the form of a tax credit eligibility memo or opinion provided by a well-regarded CPA or law firm.
Indemnification: Seller indemnities and, where available, parent guarantees and/or tax credit insurance policies mitigating buyer loss in the case of a disallowance.
Payment timing: Aligning payments with the completion of independent verification provides certainty to the buyer that the credits have been generated without the risk that the credits will be disallowed after payment.
These measures, combined with the lack of recapture, provide a high degree of transactional certainty and minimized risk for buyers of §45Z credits.
A Great Tool for Efficient Tax Management
For corporate buyers, §45Z credits offer a repeatable, low-risk tool for efficient tax management. Multi-year transactions can lock in predictable tax offsets throughout the transaction life, smoothing effective tax rates and supporting corporate tax planning. With transaction volume expected to surpass $20 billion, the §45Z market is proving to be one of the lowest risk, most bipartisan, and most liquid of the renewable energy credits.
For more information, reach out to our renewables expert, Faith Larson, at faith@mickco.com or 605-977-4873 ext. 4.
The Company should seek independent legal, tax, and accounting advice as part of this process. Mickelson & Company is not providing legal or accounting services.