Do You Need Insurance for Green Tax Credits?
May 22, 2023
The federal government offers two primary incentives for renewable energy projects: an investment tax credit for eligible investments in property, such as solar panels, and a production tax credit for electricity from renewable sources. The Inflation Reduction Act of 2022 also included several potential “adders,” or benefits that increase tax credits for these energy projects.
To qualify for these credits, the projects must meet certain requirements. For example, your project may need certification from a licensed engineer who deems that appropriate energy-saving levels have been met.
Tax insurance policies for renewable energy projects insure against the risk that the investors are ineligible for the anticipated tax credits. It can be purchased for all or only a subset of requirements. This article explains what you need to know about insurance for green tax credits.
Who Buys Insurance for Green Tax Credits?
Tax credits are one of the primary federal incentives to encourage investment in solar, wind, hydroelectricity, and other renewable energy projects. However, developers of renewable energy projects may only be able to use some of the anticipated tax credits themselves.
One way to still gain benefits is to partner with tax equity investors who provide low-cost financing in exchange for being allocated the tax credits. Given the significance of the anticipated tax credits to the tax equity investors (whose return is primarily driven by the credits), many renewable energy projects would only proceed with tax insurance in place.
How to Get a Green Tax Credit Insurance Quote
The placing of this type of insurance is a two-part process. The first step is taking the risk out to market and obtaining quotes. The following company information is needed:
- Ownership structure
- Expected commercial operations date (COD)
- Expected investment tax credits (ITCs)
- Full appraisal
- Cost segregation study
- Base case model
- Loss calculation
The following coverage information is also required:
- Insured tax position (i.e., qualified basis, allocation of qualified basis, recapture, the beginning of construction, and qualification for “adders”)
- Limits requested
- Retention (typically for contest costs only)
- Tax penalty coverage (additional taxes, interest, penalties, and contest costs above retention and gross-up)
- Anticipated binding date
If the quotes are viable for the renewable energy project, the second step is to go through the due diligence process, which requires additional documentation and a roughly $50,000 fee before binding.
How Does Tax Credit Insurance Support Green Outcomes?
Tax credits are an established tool for encouraging social or environmental investments. For tax equity investors, who are typically the beneficiary of the insurance policy, a key incentive to invest in these projects is the monetization of the associated tax credits, which then provides funding for project development.
These policies work to encourage further investment in these types of green projects by providing some certainty regarding the availability of tax credits to tax equity investors.
Here’s an example. Let’s say a technology company wants to invest in a wind energy company. Because this investment is outside the tech company’s core business, it seeks protection so that the tax benefits would not be compromised if a recapture event takes place.
With tax credit insurance, the tech company has the assurance that there would not be a tax loss due to a recapture event. The tax credit insurance policy would include a limit equal to the amount of projected tax benefits and provide coverage through the close of the pre-capture period.
With these safeguards in place, the tech company can proceed with the investment in the wind energy company with confidence.
If you have questions about green tax credit insurance and how it can benefit your business, contact your Woodruff Sawyer representative.
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