Shaking up the Magic 8-Ball – What does the U.S. IRA Monetization Look Like in 2025?

Inflation Reduction Act – Direct pay and transferability 

First, a quick and brief reminder on the IRA and the monetization techniques. The IRA expanded upon existing energy tax credits (and other tax incentives) and introduced new ones. And critically, the IRA also brought to life two new monetization techniques for the energy tax credits – direct pay and transferability. 

Under the “direct pay” provisions, certain tax-exempt and governmental entities can make a direct pay election for a group of specified tax credits in the IRA, which essentially makes those credits refundable by the IRS. For a small subset of credits in the IRA, direct pay is not limited to tax-exempt and government entities; anyone can elect direct pay. 

Additionally, under the “transferability” provisions, anyone not eligible for direct pay can elect to transfer all or a portion of their credits to an unrelated party for cash consideration. This ability to sell tax credits has significantly expanded the pool of financing options for renewable energy developers and has multiplied the tax credit market. In contrast to the fairly complex tax equity structures which used to be the only game in town to monetize energy tax credits, the relative simplicity of the transferability regime has brought a new wave of capital to the renewable energy industry. 

Since the IRA was passed over two years ago, there has been tremendous enthusiasm around the renewed tax credits and the new monetization techniques. The energy marketplace Crux estimated that the transferability market would reach $22 billion by the end of 2024.

The future of energy tax credit monetization

Let’s fast forward to January 20, 2025. What are we likely to see under the new Trump administration and a Republican-controlled Congress? There has been a good amount of speculation about the future of the IRA, but much of that discussion has been focused on the specific tax credits that could be subject to attack, as opposed to the monetization techniques. 

From a technical perspective, use of either monetization technique requires at least two separate sections of the Internal Revenue Code (Code). For example, assume a taxpayer places qualifying energy property into service, generates an investment tax credit (ITC), and then wants to sell that credit to an unrelated party for cash. First, we need Section 48 (or Section 48E starting for projects that begin construction or are placed in service after 2024) of the Code, which is the operative provision that permits the taxpayer to claim the ITC. Second, we need Section 6418 of the Code, which has the transferability mechanics. 

So what is the outlook for the monetization techniques? Will they survive the new administration? 

“Outlook good” – Despite all of the campaign promises, no one is anticipating a full repeal of the IRA. Many of the tax credits and other incentives have proven incredibly popular, especially in Republican-controlled districts. However, even if Congress is able to repeal certain credits, or revise the credits to limit their applicability, they could decide to leave direct pay and transferability on the books. Ultimately if Congress needs revenue raisers in a 2025 tax bill to support an extension of certain expiring tax cuts from the Tax Cuts and Jobs Act, they are likely to go directly after the credits themselves rather than the monetization provisions. 

“Don’t count on it” – Given the immense popularity of the monetization techniques to finance renewable energy investments, Congress could decide to repeal direct pay and transferability or revise them in a way that limits their applicability or reduces their appeal. They might repeal only direct pay to deny tax credits to entities that don’t pay taxes, while preserving transferability for tax-paying entities. Or to maximize the revenue impacts, a repeal of both techniques would be a back-door approach to reduce the budget cost and value of clean energy tax incentives if Republicans are unable to garner sufficient votes to repeal the base IRA tax credits. The loss of the ability to monetize the credits would certainly negatively impact the amount of money flowing into the industry for new projects. 

“Reply hazy, try again” – As noted above, the IRA has been well received by many across the country, including in “red” districts where many projects benefiting from the IRA tax incentives are located. While the Republicans will control both houses of Congress, they will do so by very slim majorities. Although a 2025 tax bill is likely to happen, infighting among Republicans about the scope of changes to the IRA may limit the extent of any amendments, or theoretically derail changes entirely. 

Authored by Jessica Millett, Jamie Wickett, and Stephen Weinstein