What Buyers Need to Know About Timing When Purchasing IRA Tax Credits

Tax year-end alignment: Buyer considerations & strategy

Dec 5, 2024

Sarmishta Mahendra

When purchasing IRA tax credits, buyers often prioritize maximizing tax benefits and ensuring compliance. However, one often-overlooked factor—the seller’s tax year and tax filing timing—can have significant implications on credit transferability and application. This guide highlights how seller tax year-ends affect corporate buyers and why understanding the timing of the seller’s fiscal cycle is crucial to an effective tax credit strategy.

Why Seller Tax Timing Matters

A seller's tax year-end is essential to consider because it both defines the period within which they must transfer credits and the years in which the buyer must use them. Many sellers operate on off-calendar fiscal years, typically ending at the close of the first, second, or third quarter rather than the fourth. These off-calendar schedules often align with their tax years, meaning their tax reporting spans a 12-month period different from the calendar year.

Understanding these variations in seller tax timing enables corporate buyers to better align their own fiscal plans, tax payments, and expected returns on credit investments. It also helps buyers anticipate when specific credits will become available and plan accordingly.

Three Key Scenarios for Buyer and Seller Tax Year-End Alignment

1. Both buyer and seller have a tax year ending on December 31.
2. Buyer’s tax year ends before ( June 30) seller’s tax year ( December 31).
3. Buyer’s tax year ends after ( December 31) seller’s tax year ( June 30).

Factors for Corporate Buyers to Consider

1. Seller’s Tax Return Deadline/Seller’s Tax Year-End

• Calendar Year-End: Sellers with tax years ending on December 31 must transfer credits by the following October 15 (or September 15 for partnerships). Most credits from these sellers will be available for buyers with a calendar year-end to apply at the start of their fiscal year (as long as the project is placed on-line during that fiscal year).
• Non-Calendar Year-End: Sellers with non-calendar fiscal years— June 30 or January 31—can have tax credit sale deadlines as late as the tenth month after their calendar year ends. Even from a project that has already been placed on-line, credits from these sellers might only be applicable in the buyer’s next fiscal year, potentially creating a delay for companies needing immediate tax relief.
• Additional Timing Considerations: If a project was built in the previous calendar year, a buyer might still claim the credit in the current year if the seller’s and buyer’s tax years align appropriately.

2. Credit Application Timing and IRA Compliance

The IRA requires buyers to apply credits in their first tax year ending on or after the seller’s tax year in which the credits were generated. This means buyers with fiscal cycles ending before the seller’s tax year-end must wait until the next fiscal period to utilize credits, potentially impacting cash flow projections and tax planning.

To better understand this, consider the following scenarios for tax years ending in 2024 (FY24), assuming the credits are generated when a project is placed in service:

Scenario 1: Straightforward Application

• Project placed in service during seller’s FY24.
• Buyer’s Action: Buyer applies credits immediately to FY24 taxes.
• Outcome: Simplified process with full alignment between project placement, credit generation, and buyer tax year.

Scenario 2: Seller's Previous-Year Credits

• Buyer’s FY24 overlaps with but ends before seller’s FY24.
• Project placed in service during seller’s FY23.
• Buyer’s Action: Buyer applies credits to FY24 taxes (if credits are still available and transfer deadlines are met).
• Outcome: Allows use of older credits for immediate tax relief.

Scenario 3: Misaligned Fiscal Years

• Buyer’s FY24 overlaps with but ends after seller’s FY24.
• Buyer’s Action: Buyer applies credits from projects placed in service during the seller’s FY24. This could include projects placed in service in calendar year 2023 but may exclude projects in calendar year 2024 if outside seller’s FY24.
• Outcome: Complex scenario requiring precise alignment.

Additional Considerations

• Carrybacks/Carryforwards:
  • Credits can be carried forward or back if unused in the intended fiscal year.
  • Carrybacks require reopening old tax returns, creating administrative burdens.

Strategic Planning:

• Timing rules are crucial for aligning fiscal goals with credit utilization.
• Buyers should evaluate their fiscal cycles against project placement schedules to optimize tax planning.

3. Impact on Financial Planning and Cash Flow

• Buyers with the same tax year-end as the seller can benefit from the application of credits, enabling them to adjust estimated tax payments and optimize cash flow. However, to reduce estimated tax payments for the current tax year, buyers must intend to purchase credits applicable to that same tax year. Many buyers also require binding purchase agreements to ensure the credits materialize in time, avoiding interest or penalties for delayed payments.
• Buyers with a fiscal year ending before the seller’s year-end should consider purchasing credits early and plan their purchases for future application to offset upcoming tax obligations, OR consider purchasing from older projects, which could be used against their current year obligations or an unfiled tax return for their previous year. For example, if a buyer’s tax year ends on June 30 and a project from a seller with a calendar year-end tax year comes online in January, those credits may only be applicable to the buyer’s next fiscal year. Conversely, buyers can still apply credits from projects that came online earlier (e.g., in January of the previous calendar year) if they acquire them in time.

4. Negotiating Purchase Terms Based on Seller Timing

To safeguard against potential timing mismatches, buyers can negotiate provisions in purchase agreements, such as:

• Timing Clauses: Terms requiring delivery of credits by a specific date.
• Contingency Terms: Price adjustments or other measures if credit transfer timing does not align with expectations.

Stay Ahead by Planning with Seller Timing in Mind

For buyers, understanding the seller’s tax year-end is critical when purchasing IRA tax credits. By considering these factors, buyers can better align their financial planning and ensure compliance, optimizing the value they gain from tax credits. For additional insights or support on how tax year timing affects your credit purchase strategy, contact our team.