All clean energy advocates will agree on a single point: The Inflation Reduction Act is indeed a game-changer when it comes to making clean energy affordable. One of the major components of the IRA is the Investment Tax Credit (ITC).
The Investment Tax Credit (ITC) are credits given based on how much it costs to develop a solar energy system that meets the requirements before December 31, 2024. The ITC program is also expanded and extended by the IRA. It provides firms with tax credits for investing in or building facilities that produce renewable energy, such as solar, wind, geothermal, and other clean energy technologies, that go into operation after December 31, 2024.
The IRA’s most important new feature is the ability to transfer ITCs. Taxpayers can now transfer ITCs to an unrelated taxpayer for cash under the IRA. This provides more flexibility. The transferability clause allows businesses that do not have sufficient tax liability to fully utilize the ITC, freeing up capital for those who need to pay their taxes.
However, there are some common pitfalls that many people tend to overlook, which is why in this article, we’ll discuss the common pitfalls you need to avoid when preparing for an Investment Tax Credit transfer.
Pitfall 1: Treating “Required Minimum Documentation” as Sufficient
The first mistake many people make with ITC transfers is relying solely on the minimum documentation and assuming it is enough. While the final regulations (T.D. 9993) outline the bare minimum, customers today increasingly expect more comprehensive records to meet “reasonable cause” standards.
If you limit yourself to the bare minimum documentation, you may encounter multiple issues, including:
- Slower negotiations
- Increased audit exposure
- Buyer pushback or pricing discounts
To go the extra mile, include additional forms of documentation, such as cost segregation, placed-in-service substantiation, financial statements, and bonus credit evidence, as these will be valuable over time.
Pitfall 2: Incomplete or Poorly Organized Due Diligence Materials
A common tendency among developers is to prepare documentation at the last minute. While this is not inherently wrong, it creates opportunities for oversights, and oversights can turn into penalties at any time. Using Excel tracking, ad-hoc sampling, and scattered PW&A documentation is tedious, and this tediousness often leads to errors.
The solution is to prepare diligence data proactively before negotiations, ensuring that datasets are complete and validated. This approach helps avoid problems such as deal delays, renegotiations, and an inability to satisfy buyer or insurer underwriting later on.
Pitfall 3: Overestimating or Underestimating the Scope of Due Diligence
If you are handling ITC transfers for the first time, there is a chance you are unaware of the exact amount of due diligence required. You may assume “x” amount is needed, while the required amount is actually “y.” This misalignment can create significant problems.
Some buyers continue to perform tax equity–level diligence, which is unnecessarily costly and introduces friction. On the other hand, sellers may provide only the bare minimum, which is unacceptable to buyers and insurers. The ideal approach is to follow a balanced, standardized scope, which is the trend in the market. The scope should include:
- Cost segregation
- Placed-in-service evidence
- Insurance coverage
- PWA compliance
- Bonus credit validation
- Seller creditworthiness
Failing to align with the correct scope can result in unnecessary deal standoffs and delays.
Pitfall 4: Ignoring Recapture Risk or Assuming It Never Happens
Recapture risk is real, even if rare, and it can have serious consequences for transferees. Common mistakes include:
- Assuming recapture is a “developer-only risk”
- Failing to define notification timelines or indemnification procedures
- Not gathering or maintaining records necessary for an IRS challenge
To mitigate this risk, the best course of action is to develop a recapture mitigation strategy. Strategies may include:
- Clear contractual obligations for notice and cooperation
- Ongoing operational compliance monitoring
- Recapture insurance where appropriate
Pitfall 5: Weak or Nonexistent Prevailing Wage & Apprenticeship Compliance Controls
Buyers face real problems when non-compliance occurs after project transfer. Common errors include:
- Treating commissioning as non-construction
- Missing documentation from subcontractors
- Confusing PII-restricted PWA data with IRS audit–required data
- No ongoing compliance program after the Commercial Operation Date (COD)
To avoid these issues, implement an ongoing compliance program and developer tracking, which ensures smooth delivery and prevents problems after transfer.
Pitfall 6: Failing to Leverage Automation or Digital Diligence Tools
Leveraging automation tools is essential for efficient and accurate diligence.
| What Happens | Manual Process (Old Way) | Automated Process (Better Way) |
|---|---|---|
| Error Rates | People chase files across emails, rename documents differently, and miss small details. Mistakes slip through. | The system pulls all files in a consistent format, checks for gaps, and flags issues early, reducing human errors. |
| Time-to-Close | Teams spend days or weeks hunting for documents, re-requesting files, and cleaning messy spreadsheets. Deals get delayed. | Files are organized, clean, and validated upfront. Negotiations move faster. |
| Audit Risk | Sampling or partial data may mean that something required by the IRS is missing during an audit. | Complete datasets are stored and organized from the start, ready for IRS review. |
| Overall Confidence | Buyer, seller, and insurer are never fully confident that the file is complete. | A full digital trail provides peace of mind, smoother closings, and easier audits. |
Conclusion
These are some of the common pitfalls to avoid while preparing for an Investment Tax Credit transfer. By proactively addressing these pitfalls, you can ensure the entire process is smooth, seamless, and error-free, giving all parties peace of mind.