What is the product?

Tax credits continue to be one of the primary incentives to encourage investment in solar, wind, and other renewable energy projects and are relied upon by institutional tax equity investors to support funding for these projects.

Tax insurance can bring certainty to a variety of tax equity investments. Because tax equity investors are passive parties to the investment, they are subject to a number of tax risks, including: the investment structure not being respected; the transaction not qualifying for the projected tax benefits/credits; the loss of tax benefits through recapture. Tax insurance helps manage these risks and was identified by the IRS in Rev. Proc. 2014-12 as a preferred vehicle over guarantees by transaction parties.

How does it support green outcomes?

Tax credits are a staple of the federal and state government’s toolbox to encourage a variety of social or environmental investments. For tax equity investors, who are typically the insured or beneficiary of the insurance, a key incentive to invest in these projects is monetizing the associated tax credits, which in turn provides a source of funding for the development of the projects. These policies further encourage investment in these types of projects by providing additional upfront certainty regarding the availability of anticipated tax credits to tax equity investors.

How does it enable customers today?

A tech company sought to invest in a fund sponsored by a solar energy company that would, in turn, invest in a portfolio of residential and commercial projects. Because the investment was outside its core business, the tech company required protection that the projected tax benefits would be received and not lost due to a recapture event. Tax credit insurance was used to assure the investor that the investment vehicle would be respected as a pass-through entity, that the solar facilities would indeed qualify for the credit and the tax basis would be respected, and that there would not be a tax loss due to recapture. The referenced tax credit insurance policy included a limit equal to the amount of projected tax benefits and provided coverage through the end of the precapture period. Wrapped by the insurance policy, the investment was perceived as prudent for the tech company, and it was approved by the investor’s commitments committee.