Tax Credit Transfer and Recapture
Definition
Tax credit transfer is the sale of an eligible clean energy credit for cash to an unrelated taxpayer under section 6418 of the Internal Revenue Code. Recapture is the repayment of all or part of an investment credit when a recapture event, such as a disposition of the property or a change that disqualifies it, occurs within the recapture period, generally five years after the project is placed in service.
Why it matters
Transfers let projects turn credits into cash without a tax equity partner, but the credit's value still depends on the project qualifying and staying compliant for years. A sale price below face value, indemnities, insurance and the recapture period all affect what the sponsor, and investors in its funds, actually keep.
Common misconceptions
- •A sold credit is not risk-free for the seller; indemnities often bring recapture risk back.
- •Recapture usually concerns investment credits; production credits are earned as output is sold.
- •Individuals buying credits face passive activity limits that most investors cannot use.
- •Insurance capacity is finite; large portfolios may be only partly covered.
Technical details
IRS transferability FAQs (questions 13 to 15)
The transferee bears recapture for 48, 48E and 48C credits, proportionately if the seller retained part.
The transferee cannot claim depreciation on the project.
Individuals and similar taxpayers are subject to passive activity rules.
Events listed in the Pelican's Jaw documents
Failure to meet prevailing wage and apprenticeship requirements.
Failure to qualify for the domestic content or energy community bonus.
Recapture, loss or disallowance of any part of the ITC under section 50.
A placed in service date that is not respected.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Can sold energy tax credits create later investor liabilities?
- Yes, through recapture and the contracts around it. The IRS says that for transferred credits under sections 48, 48E or 48C, 'the transferee bears the financial responsibility for a recapture event,' proportionately if the seller kept part of the credit, and the seller 'is required to notify the transferee.' Buyers therefore negotiate indemnities and insurance, which push the economic risk back to the seller.
- How do sellers manage that risk?
- With indemnities and insurance. SB Energy's tax equity arrangements 'typically require us to indemnify our tax equity investors for the reduction, denial or recapture of ITCs,' and it uses tax credit insurance, but warns that 'the available market capacity for tax credit insurance may not be sufficient' and that a recapture event 'within the five-year recapture period' could leave it funding a shortfall itself.
- Can individuals buy credits?
- They can, with limits. The IRS says individuals, estates, trusts and certain closely held corporations are 'subject to the passive activity rules for any purchased credits,' generally limiting use to passive income tax liability. A buyer also cannot claim the project's depreciation.
- How do projects use transfers in practice?
- Alongside tax equity. Clearway held $174 million of transferable ITCs for its Rosamond South I solar and battery facility 'received on behalf of the tax equity investor' and distributed them in January 2026. Pelican's Jaw's financing repays its bridge loans from tax equity fundings and tax credit transfer proceeds.