Educating businesses on the IRA is the next corporate windfall

The pain of missed opportunity can leave a wound as deep as a CFO learning that they just overpaid their federal taxes. After all, a CFO is the first line of defense for a company’s financial health and stability. Now, imagine that the overpayment totaled 10%, and the total cost is the annual savings compounded in cash and commercial opportunity lost every year beginning in 2021.

That pain was undoubtedly felt by many CFOs in the summer of 2024 upon discovering that this hypothetical setup was in fact real. Their combined oversight contributed to approximately $100 billion dollars in corporate and HNW (high-net-worth) overpayment in 2023 taxes.

This August will mark two years since the passage of the groundbreaking Inflation Reduction Act, also known as the IRA. Unlike the other type of IRA, Individual Retirement Accounts, this more recent IRA puts money back into the pockets of U.S. businesses and individuals today. Not only are its cash benefits substantial and easily attainable, the legislation has catalyzed the largest coast-to-coast investment campaign into energy infrastructure and domestic manufacturing in 80 years. It bears repeating, there’s a lot about the IRA to get excited about.

Yet according to a Washington Post-University of Maryland poll released last year, only one-in-five Americans said they knew a decent amount about the IRA, and many of those individuals who failed to understand the shift in the U.S. tax code were the exact professionals tasked with providing leadership and advisory services to those who were most likely to qualify. That’s exactly why imposing upon CPAs, CFO, tax attorneys and other professionals to learn the IRA and to take full advantage of its benefits can be as important as counting dollars and cents.

From the perspective of the national interest, the IRA is the largest public works and infrastructure spending bill since FDR. Some call it the “Green New Deal,” echoing the immense efforts to stimulate the economy and address long-term challenges in America during the historic 1933-1939 period.

The IRA instituted a remarkable stimulus plan to build approximately $500 billion in clean energy and mobility infrastructure from 2023 to 2033. Its genius is in the details of how the money for development expenses is sourced—not through inflationary money-printing and bond sales—but rather through Investment Tax Credits (ITCs). Simply put, renewable energy developers in need of project financing receive ITCs from the Treasury equal to $1 each. The ITCs are transferable, allowing the developer to sell credits at a discount to $1 and use the proceeds to capitalize their projects. The purchasers of credits range from C corporations to individuals, who purchase credits at a discount and claim a $1 credit against their federal tax obligation.

How the IRA benefits business

Due to a knowledge deficit on the IRA, most eligible tax accounts across the U.S. totally missed the guidance issued by the IRS in June 2023 and April and June 2024. However, with the government’s current instructions disseminated, analyzed, and battle-tested for a year, it’s ready for widespread adoption. 

Providing tax credits for projects and purchases related to clean energy has been going on for over a decade in the U.S—but not like this. The IRA offers unprecedented monetary incentives and tax credit transferability, which enables renewable energy tax credits to be sold separate from the project ownership for the first time ever.

In essence, these tax credits take a company’s tax liability and transform it into an income-generating asset. The loss is absolute when paying the IRS. Tax credits create the outcome of a return. Some tax credit structures pass the depreciation and a portion of the project cash flows back to the investor for additional savings. Doing so enables taxpayers to meet their obligation to the IRS—an optimized obligation—while financing clean energy and green investments in the US.

It’s important to note that there is currently far more demand than supply of credits, since the construction period for large, grid-scale clean energy projects can be as long as 24-36 months. So while investors are acquiring 2024 tax credits for the current year, the most sophisticated ones are also signing multi-year commitments out of a rational fear that there will be a dearth of credits when they need them the most in the future.

For example, I’m seeing a massive amount of buyer interest from C corps and HNIs seeking 2023 credits to offset their current tax bill. Unfortunately, those credits are long gone. They no longer exist because they’ve been sold and monetized by other tax accounts who followed the developments of the IRA.

In other words, if you want to get involved, do it now. The risk reduction alone is worth the reward.

How the IRA benefits renewable energy developers

We can also give attention to the benefits for renewable energy developers, who originate the tax credits to sell them off to accounts burdened with tax liability. Because tax credits are now transferable, an enormous peer-to-peer market has sprung up to facilitate cash transactions between buyers and sellers. Estimates suggest that the size of the ITC transfer market in 2023 topped $8 billion. A renewable energy developer can expect the Treasury to issue them an amount of credits equal to 30% of the valuation of their project.

A  comparative advantage to renewable energy tax credits for project developers is that they will produce returns for their investors faster than credits generated from other environmental markets, such as carbon credits. To sweeten things, tax refunds on financing projects can take as little or long a time as it takes to file an income tax return with the IRS, as opposed to the 12 months to 2 years it can take to generate and sell carbon credits.

For renewable energy developers, the IRS will provide 30 to 60 percent of the value of a new project in tax credits. Without tax credits developers typically need to raise money for their projects from a variety of different sources, often private equity funds, which is an expensive cost of capital.

Buyers can offset up to 75% of their federal tax liability per year. They can purchase credits at a discount to $1 or participate in “tax equity” transactions, which cost more than $1 per credit, but also deliver depreciation and cash. Credits have a three-year carry back for receiving a rebate from the IRS on previous taxes paid, or credits may be held for 20 years.

There is still time to take advantage of the Inflation Reduction Act for accounts with tax liability in 2024. But financial advisors will need to act swiftly. When these tax credits are optimized properly, what benefits taxpayers has an equally positive impact on people, profit, and the planet.

Adam Carver is the CEO of Bitgreen, a technology disruptor that develops marketplaces and adjacent software for carbon credits, renewable energy project finance, and tax equity investing. Founded in 2021, Bitgreen’s team of sustainable finance and Inflation Reduction Act experts have established the company as a key player providing transparency and aggregating capital for high impact projects. Prior to Bitgreen, Adam began his career in structured finance at Morgan Stanley and the Royal Bank of Scotland. He later completed a dual master’s in Sustainable Systems and transitioned to venture capital and entrepreneurship for a decade.