If you are involved in clean energy projects, you may already know how valuable Section 48 ITC can be. These investment tax credits can make a significant difference to the financial performance of a project. However, claiming and transferring these credits comes with its own risks. That is why thorough due diligence is important. So you need to understand the process. It can help you navigate transactions smoothly, reduce risks and ensure compliance.
Understanding Section 48 ITC Due Diligence
Section 48 ITC gives you credits for investment in various energy properties. Buyers, sellers and their advisors need to check the project to make sure it qualifies carefully. They also need to confirm the costs are correct and that any bonus credits are given properly.
A structured due diligence process covers:
- Transaction overview
- Major deal participants
- Seller diligence
- Project qualification
- Structure verification
- Recapture prevention
- Prevailing wage and apprenticeship compliance
- Bonus credit verification
- Tax credit insurance
Let’s break these down in simple terms.
Transaction Overview
When reviewing a transaction, you should have a clear snapshot of the project. This includes:
- Sponsor details and technology used
- Project size and location
- Placed in service (PIS) date
- Eligible cost basis and resulting ITC credit amount
- Details of financing and any bonus credit adders
This overview helps you understand what you are dealing with and ensures nothing is overlooked.
Major Deal Participants
Section 48 ITC transactions involve multiple parties. Keeping track of everyone ensures clarity throughout the recapture period, which can last five years. Key participants include:
| Participant | Role/Information to Verify |
| Seller | Company name and principal place of business |
| Guarantor | Company name and relationship to seller |
| Offtaker | Entity purchasing the power |
| Seller counsel | Company and point of contact |
| Tax credit insurance broker | Company and point of contact |
| Tax credit insurer | Company and point of contact |
Seller Diligence
You should review the seller’s background and documents carefully. Key areas include:
- Organisation chart: Shows ownership and tax treatment
- Affiliate transactions: Verify if any fees included are from related parties
- Corporate and financial documents: Check financial strength to ensure indemnity obligations can be met
- Legal actions: Confirm that no pending legal issues could affect the project
Qualification of the Project
You must confirm that the project qualifies for Section 48 ITC. Check:
- Project description and scope
- Construction start date and PIS date
- Cost segregation studies to validate cost basis
- EPC contracts for compliance with wage and subcontractor rules
- Appraisals for fair market valuation
- Transfer filings and registration
Structure and Ownership
Ensure that your seller is eligible to transfer the credits and that the IRS will respect the project’s legal structure. You should verify if there are any joint ventures, ownership percentages and risk exposure.
Recapture Prevention
Credits can be recaptured if the property changes ownership or is no longer a qualified energy property within five years. You should check:
- Site control documentation
- Interconnection approvals
- Operations and maintenance contracts
- Property and casualty insurance
- Revenue or offtake contracts
Ensuring these elements are in place helps you to prevent the IRS from reclaiming credits.
Prevailing Wage and Apprenticeship Compliance
Some projects have to follow the current wage rules. You should verify that:
- Proper payroll records exist
- Subcontractors and employees are compliant
- Exemptions are documented if applicable (small projects or early construction start)
Bonus Credits Verification
Projects can claim bonus credits for using local materials, supporting energy communities or helping low-income communities. Make sure you have all the right documents and certifications to support these claims. Keeping everything organised will make your approval process smoother and easier.
Tax Credit Insurance
If the seller cannot provide an indemnity, you can use tax credit insurance to protect against risks. The risks can be qualification, recapture, structure issues, prevailing wage compliance and bonus credits. Make sure the policy is enough to cover any losses. This gives you extra peace of mind when you move forward with the deal.
Summing Up
If you deal with Section 48 ITC transactions, doing proper checks is a must. Skipping this due diligence can lead to serious problems. You need to follow the structured processes, verify documents and address all risks. This ensures you get compliance, you can protect your investment and make the most of the available tax credits.
Use careful planning and proper documentation. It helps you to reduce risk, stay compliant and leverage Section 48 ITC effectively in your clean energy projects.
