A Solution to the §45Z Buyer-Size Mismatch
As 2025 tax year filing approaches, a new frontier in corporate tax strategy is emerging through the direct transfer of renewable energy credits. While Section 45Z production tax credits offer a lucrative avenue for biofuel producers and corporate buyers alike, the high entry point—often exceeding $30 million annually—has historically sidelined smaller corporate tax payers. To bridge this gap, innovative "buyer’s clubs" and fund structures are gaining traction, allowing mid-sized banks and other corporate taxpayers to pool their resources. By aggregating smaller tax appetites into unified limited liability companies, these entities can navigate the complexities of the §45Z market, sharing the administrative burden while securing the financial benefits of large-scale tax credit vehicles.
High Entry Costs Sidelining Smaller Taxpayers from the Section 45Z Credit
Renewable energy tax credits are available for direct transfer to taxpayers with a federal tax bill. 2025 tax credits may be transferred at any time up until the buyer and seller file their 2025 tax returns. A corporate buyer can offset up to 75% of their tax bill with a tax credit. Tax credit pricing varies between $0.90 - $0.94. At $0.92 pricing, a $10 million tax credit may be purchased for $9.2 million, leaving the buyer with $800,000 of after-tax net income.
Biofuel producers (e.g. ethanol, biodiesel, renewable natural gas) are eligible to earn a federal production tax credit for the 2025-2029 tax years under §45Z of the tax code.
Many of these biofuel producers, particularly in the ethanol industry, are legacy businesses with over 20 years of operating history and strong financial statements capable of indemnifying for the credit amount. As a production tax credit, §45Z buyers do not purchase the tax credit until after the production has occurred, nor do they encounter a possible subsequent recapture of the tax credit due to a five-year operating requirement common with many one-time investment tax credits. Consequently, §45Z production tax credits are a popular choice for corporate buyers.
However, most biofuel §45Z production tax credits are $30 million annually or larger. How does a bank or other corporate taxpayer with only a $5 or $10 million annual tax credit appetite access the §45Z tax credit market?
Bridging the Gap: Pooling Resources for Section 45Z Access
Mickelson & Company continues to evaluate the benefits of a fund, where multiple smaller corporate taxpayers join a limited liability company or partnership for the purpose of purchasing one or more §45Z tax credits that total an amount greater than any one buyer could utilize by themselves. There are economies of scale in due diligence, legal, insurance and other costs. It does, however, bring additional ongoing administration and reporting obligations. A fund also requires sharing decision-making rights with respect to underwriting and deal terms or outsourcing them to a trusted third-party provider. This fund structure makes sense for some buyers, especially those comfortable making a multi-year commitment.
An alternative to this fund is referred to as a “buyer’s club,” where one producer with a larger §45Z production tax credit negotiates one tax credit transfer agreement with multiple buyers. This has the benefit of allowing smaller federal taxpayers the ability to access the higher-quality, lower-risk §45Z tax credits otherwise reserved for the more traditional Fortune 500 companies, but without the ongoing administrative and tax reporting obligations common with a fund. Mickelson & Company is actively coordinating these buyer’s clubs as a credible solution that allows rural biofuel producers to be paired with multiple banks or other corporate taxpayers who may have a commercial relationship but not the tax liability to purchase the entirety of the tax credit amount.
Please contact Mark Mickelson, President/Founder, at mark@mickco.com or 605-977-4873 ext. 1, or one of our team members if you are interested in learning more about these possibilities.
The Company should seek independent legal, tax, and accounting advice as part of this process. Mickelson & Company is not providing legal or accounting services.