Renewable Energy Tax Credits: How Updated Guidance Impacts What Insureds Are Looking For in Their Policies

For those in the renewable energy space, 2024 has been an interesting year: The IRS released three key updates to the Inflation Reduction Act (IRA), a law aimed at investing in domestic energy production while incentivizing taxpayers to pursue clean energy, among other items.

On March 22, 2024, the IRS released Notice 2024-30, expanding certain rules for determining what an “energy community” is within the context of production and investment tax credits and providing taxpayers with an increased tax credit. In April 2024, final transferability regulations were released, which govern the transfer of renewable energy tax credits between entities.

Lastly, on June 18, 2024, the IRS issued final prevailing wage and apprenticeship regulations, streamlining the qualification criteria for claiming increased credit for certain renewable energy projects. With a few exceptions, the PWA regulations ensure that certain parties involved in the construction, alteration and repair of renewable energy projects are paid fairly and apprenticeship programs are utilized.

“The value of these tax credits varies greatly depending on the project and the amount of credit that can be claimed. We have seen policies covering multiple projects in a portfolio fund with coverage up to $1 billion. On the other hand, we also encounter smaller policies, such as a $5 million policy covering a single project, which may only be claiming the 30% credit,” said Danielle Nieh, head of tax liability for QBE North America.

With several new tax credit guidance updates in play, many policyholders are looking at ways to keep themselves protected.

Understanding Tax Credits and Their Associated Risks

Danielle Nieh, Head of Tax Liability, QBE North America

Under the new transferability rules, renewable energy tax credits can be sold for cash. With respect to these transfers, “tax credits are primarily used by purchasers to offset their own tax liabilities. The credits are generally limited to a single transfer, meaning they cannot be bought and resold multiple times for investment purposes,” Nieh explained.

Tax credit transactions open companies up to potential risk if they are not thinking ahead and making sure their assets are covered in advance. To combat this, companies can take several steps to mitigate the risks associated with tax credit transactions.

First and foremost, it’s crucial to conduct thorough due diligence on the tax credits being considered for purchase or sale. This includes verifying the legitimacy of the credits, ensuring they are properly certified and confirming that all necessary documentation is in order.

Companies should also seek guidance from experienced tax professionals and legal counsel who specialize in tax credit transactions. “These experts can help navigate the complex regulatory landscape, identify potential red flags and ensure compliance with all applicable laws and regulations,” Nieh said.

Another key strategy is to implement robust internal controls and governance processes around tax credit transactions. This may involve establishing clear policies and procedures, setting up appropriate approval workflows and maintaining detailed records of all transactions.

Finally, companies can look to their insurance partner and the tax liability policy they have in place as a means of continued protection.

Looking At a Full-Scope Policy

According to Nieh, there are three main buckets that insureds want coverage for under a tax credit liability policy: qualification risk, recapture risk and structure risk. Due to the expanding coverage options for renewable tax credits, many policyholders are now looking for a full-scope policy option that encompasses all three.

Qualification risk encompasses factors that affect the amount of investment tax credits (ITCs) claimed by a taxpayer, such as whether the IRS will respect the appraised fair market value of a project and the allocation of the tax basis to ITC-eligible assets.

Recapture risk, which is outlined in section 50 of the tax code, requires taxpayers to reduce the amount of ITCs claimed in a tax year if the property generating the ITCs is disposed of or ceases to be investment credit property, “even if the ITCs were initially claimed correctly,” Nieh explained.

Finally, “structure risk involves the tax structure used within the transaction, such as partnership flips, sale leasebacks, inverted leases, section 6418 transfers or a hybrid of these structures,” said Nieh.

“Since the enactment of the Inflation Reduction Act, there has been an increase in requests for full-scope policies covering all three types of risks: qualification, recapture and structure,” she said. “Additionally, there is a growing demand for adders (qualifications that increase the amount of the credit) and transferability coverage.”

An Uptick in Transferability Coverage

The April update to the IRA introduced a significant change by allowing the transfer of tax credits to third-party tax credit buyers — something that was not possible in the past.

“The transferability regulations provide detailed guidance on how to execute the payment and election for transferring credits and how excess credit transfer penalties apply in situations involving multiple transferees or partial credit transfers,” Nieh said.

“This framework enhances transparency and reduces administrative burdens, facilitating smoother transactions within the marketplace.”

With it has come a surge in requests for coverage.

“Previously, we primarily provided coverage for tax equity investors or developers, but now we are also receiving requests from tax credit buyers seeking to benefit from tax insurance,” said Nieh.

Hybrid Tax Insurance and R&W Coverage

No two programs are exactly alike, and every tax policy is bespoke by its very nature, providing coverage for a unique project with different covered tax positions.

“During underwriting, we delve into the details regarding the project and the requested coverage in order to determine who is the insured and what their motivations are. This helps us structure a policy with specific exclusions in place to ensure we are only providing coverage for the supportable risks,” Nieh said.

Some insureds are even looking at a hybrid policy that combines tax insurance and representations and warranties coverage. These types of policies offer protection by providing coverage for both known tax risks and historical unknown risks.

“Tax insurance covers specific known issues, such as qualification risk, recapture risk and structure risk, ensuring they are supportable on their merits,” Nieh explained. “On the other hand, R&W insurance provides coverage for historical unknown risks.”

Combining these two types of insurance together creates a more comprehensive shield against potential liabilities, encompassing risks beyond the scope of a stand-alone tax policy. These policies can also be used to cover environmental factors, energy regulatory compliance and titles risks — all important for those in the space.

Nieh added, however, that it is imperative that those searching for a hybrid policy work with an insurance partner that has depth of knowledge in both spaces to truly underwrite a product that fits the exposures.

“Drafting these policies requires a more bespoke and detailed approach. It’s a complex and nuanced process that demands close attention to detail,” she said.

At QBE, “our team’s dual expertise in both R&W insurance and tax liability insurance allows us to streamline the underwriting process efficiently. We understand how each product is underwritten and can merge them into a single policy tailored to meet the unique needs of each project and stakeholder involved,” Nieh said.

An Underwriting Process That’s Streamlined and Efficient

QBE North America’s extensive experience underwriting tax credit policies gives it a unique expertise in understanding what’s standard in the market.

“We have a deep knowledge of which exclusions are necessary and which are not,” Nieh said. “While newer entrants might try to undercut on price, they may not fully grasp the scope of coverage they’re offering.

“Because we are so deeply involved in this niche, we thoroughly understand the scope of coverage, the motivations behind it and what is truly appropriate to cover,” she added.

QBE North America has reviewed the new guidance released for the IRA and has worked for its clients to better address their needs.

“The finalized regulations offer developers and investors a clearer path to execute their projects in compliance with federal guidelines,” Nieh said.

“This has enabled us to get comfortable providing coverage. With the clarity provided by the regulations, we can assess a project and determine that if certain criteria are met, we can offer coverage for these items.”

To learn more, visit: https://www.qbe.com/media/qbe/north-america/usa/files/coverage/management-liability/tax-liability-insurance.pdf.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with QBE North America. The editorial staff of Risk & Insurance had no role in its preparation.