Section 45Z and the Fiscal-Year Loophole: What Tax Credit Transfer Participants Should Know
As transfer transactions for the clean fuel production credit under Section 45Z are well underway, market participants are continuing to digest its compliance requirements, particularly the prevailing wage and apprenticeship (PWA) conditions that determine the credit amount generated. However, a subtle piece of statutory language has created a timing advantage for fiscal year taxpayers for their tax year ending in 2025.
A ‘Grace Window’ Potentially Worth Millions
Specifically, the Section 45Z(f)(6)(B)(ii) law states that clause (ii) of the prevailing wage and apprenticeship cross-reference, Section 45(b)(7)(A), “shall be applied by substituting ‘with respect to any taxable year beginning after Dec. 31, 2024, for which the credit is allowed under this section’ for ‘with respect to any taxable year, for any portion of such taxable year which is within the period described in subsection (a)(2)(A)(ii).’”
Essentially, if a taxpayer’s fiscal year began before Jan. 1, 2025, the PWA requirements, if read literally, technically do not apply to that fiscal year when credits are being generated under Section 45Z. As a result, taxpayers with fiscal years that began, for example, on Oct. 1, 2024, could claim 45Z credits from Jan. 1, 2025, through Sept. 30, 2025, without satisfying prevailing wage and apprenticeship requirements and still receive the higher credit rate, unlike their calendar-year taxpaying counterparts who must comply for the entire year. In practice, this creates a one-year “grace window” for certain producers, potentially worth millions in additional credit value.
Evaluating Buyer Comfort Level
For credit buyers, this presents a due diligence dilemma. The statute is technically clear, but the policy intent is debatable, and the IRS may later issue clarifying guidance or attempt to narrow the window. Until then, credits generated under this fiscal-year structure remain legally supportable but may be perceived as higher-risk assets in the transferability market and may not be perceived as safe as calendar-year taxpayers who have been complying with PWA for the whole credit-generation period.
Oftentimes, a good proxy for buyer comfort level is often the tax credit insurance market. If insurers view the fiscal-year language as a bona fide statutory exemption, they may be willing to underwrite coverage for these credits at standard premium rates. In that case, the buyer market will likely see strong demand and standard pricing for fiscal-year credits electing to not meet prevailing wage and apprenticeship requirements.
Documentation and Transparency Are Key
However, if insurance carriers and buyers’ advisors judge the provision as an unintended gap subject to IRS correction or future challenge, insurance coverage could become limited or heavily conditioned and will likely decrease buyer comfort. In that scenario, buyers would likely demand steeper pricing discounts to offset additional legal costs and increased perceived risk.
For sellers intending to take advantage of this timing advantage, the key will be documentation and transparency. Buyers will expect clear and sophisticated documentation on the qualification including proof that the taxpayer legitimately qualifies for the exception. Structuring indemnities and exploring tax-credit insurance early can help sustain pricing confidence.
Section 45Z’s fiscal-year substitution language opens a temporary but meaningful opportunity if executed correctly for clean-fuel producers whose tax years began before 2025. While the prevailing wage and apprenticeship rules technically deferred for these taxpayers under a black and white reading of the statute, the transfer market’s ultimate comfort will hinge on buyer’s advisors and the tax insurance industry. The 45Z tax credit transfer market is changing rapidly, and Mickelson can be your trusted advisor through every step of the process.
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.