Transferable tax credits are now growing in the market. If you plan to buy or sell these credits, you need to handle a few risks carefully. This will help you close the deal easily and keep your tax position safe.
So let’s explore clear, practical strategies you can use to reduce risk and protect value when working with transferable tax credits.
Why Risk Management Matters
The transferable tax credits market changed quickly after the Inflation Reduction Act. In recent years, the market saw billions of dollars of transfers. The activity also keeps evolving as the rules keep changing. That growth gives you opportunities. But it also leaves room for mistakes if you do not manage legal, tax, or operational risks from the beginning.
Core Risks You Need to Watch
Here are the main risks you should plan for:
- Qualification risk: The credit might be challenged by the IRS or a regulator.
- Recapture risk: You could lose your credits if the project rules are not followed within the recapture period.
- Documentation risk: Incomplete or inconsistent paperwork can delay your transfer.
- Contract and counterparty risk: You can face seller insolvency, weak indemnities, or ambiguous risks.
- Timing and registration risk: Filing windows, registration numbers, and placed-in-service dates are important.
Steps for Managing Risk
Here is what you should know as a starting point for any purchase or sale:
| Area | Action You Should Take |
| Qualification | Validate technical and legal eligibility for the credit. Keep engineering reports, cost studies and registrations. |
| Recapture | Confirm site control, interconnection, O&M and insurance that protect against loss of service during the recapture period. |
| Documentation | You should have all the transfer filings, invoices, payroll records (if prevailing wage applies) and supplier certificates. It is important to keep an audit trail. |
| Contract terms | Define representations, protections, timelines, and remedies clearly. Negotiate holdbacks if needed. |
| Third-party cover | Consider tax credit insurance or a qualified guarantor to shift certain risks off your balance sheet. |
Due Diligence That Actually Helps
Focus on targeted and practical checks rather than casting a wide net. It can be like:
- For buyers: Make sure the seller has the right to transfer the credits. Check their start dates, review cost reports or appraisals, and verify any bonus credit documentation. Always double-check the details before moving forward.
- For sellers: Make sure your contracts require subcontractors to follow the rules. Keep your records safe for the recapture period. Also, address any third-party claims that could affect ownership or eligibility. You should always be on top of these details.
Keep all your records in a single and organised folder and use standard naming conventions. This reduces time and cost if the IRS or a buyer asks for proof.
Contract Terms to Prioritise
When you draft the Tax Credit Transfer Agreement, make these items non-negotiable:
- Precise definitions of credit amount, fiscal year, and the item being transferred.
- Keep your representations and warranties in specific documents. It can be cost studies, commissioning reports, etc.
- Make sure your indemnity matches the risks and the party that can control them best.
- Escrow or holdback retains a part of the purchase price until key deliverables or registration are confirmed.
- Insurance requirements mandating that sellers carry adequate tax credit insurance or provide an investment-grade guarantor.
Using Insurance and Structural Protections
Tax credit insurance can cover qualification, recapture, and compliance with wage or bonus requirements. If a seller cannot provide a strong indemnity, insurance often makes a deal feasible. Alternatively, you should structure the transaction with staged payments tied to registration numbers or IRS confirmations.
Negotiation Strategies to Reduce Risk
- Do not accept blanket or vague warranties. Ask for document-by-document backing.
- Build realistic closing conditions that show IRS timelines and registration processes.
- Reduce your risk by breaking big purchases into smaller parts and paying only when clear milestones are met.
- Use standard market forms or existing agreements to speed up negotiations.
Summarising
If you work methodically, you can participate in the transferable tax credits market with greater confidence. You need to focus on the small things that create large problems later. So always keep an eye on precise paperwork, verified eligibility, sensible contract protections, and insurance or escrow. These steps make your transactions faster, reduce cost, and protect the value you expect to realise from transferable tax credits.