A tax credit is an economic incentive issued by a government agency to encourage the private activity, typically investments, in economic development. Such incentives can be in the form of grants, rebates, loans or tax credits. At Clocktower Tax Credits, we work with tax credits that can be sold or allocated to outside investors.
State vs. Federal Tax Credits
Tax credits are issued by the Federal government as well as U.S. State and territory governments, and thus can be applied against tax liabilities at either level.
Transferrable and Nontransferable vs. Allocable Tax Credits
Tax credits are either transferrable, meaning they can be sold by the entity earning them and purchased by another, or nontransferable. This is usually determined by the law creating the tax credit.
Most nontransferable credits are allocable to partners in a venture. As a result, many credits are monetized by developers who admit silent, “money” partners into project partnerships in exchange for capital contributions. These capital contributions resemble the sales prices paid by investors purchasing transferable credits.
Refundable vs. Nonrefundable Tax Credits
Tax credits are either refundable or nonrefundable. A refundable tax credit can be “sold back” to the State or Federal government that issued them for a specified amount defined in the rules and regulations of the tax credit program through which they were issued. Nonrefundable tax credits are redeemed only by applying the credit against a tax payment on year-end tax filings.
Almost all tax credits are a combination of these elements. For example, a film studio could be earning a State transferrable tax credit certificate. Meanwhile, a real estate developer could be receiving a Federal Historic Tax Credit that is nontransferable, nonrefundable and thus, can only be utilized by the entities in the partnership sponsoring the project earning the tax credits. The latter can be allocated to an Investor who has been admitted into the partnership.
Tax credit brokers work to facilitate the transfer of tax credits from the developers and producers earning tax credits to investors who want to purchase them to offset their tax liabilities. Not all producers or developers need a broker if they know the right staff at profitable firms paying significant taxes in the applicable fiscal year in their tax jurisdiction. However, most do not have these contacts.
As tax credit brokers, we are in daily contact with the investment community, comprising billion-dollar corporations with significant and complex tax liabilities. We seek out the most attractive programs to meet the needs of our clients and close transactions through a variety of investment structures. These transaction structures range from simple tax credit certificate sales to complex tiered partnerships.
The type of tax liability that can be offset by a tax credit is dependent upon the rules and regulations of the program through which the credit is issued. Whether a tax credit is issued at the State or Federal level also impacts which tax liabilities it can be used against. At Clocktower Tax Credits, we work in programs where tax credits can be utilized to offset corporate income, insurance premium, franchise bank, and sales taxes. We also work with programs for industry-specific taxes such as mining and gaming. We know which credits work with which taxes and use this expertise to help match project sponsors with investors.
Whether you have the tax credit certificate in-hand or are in the planning stages of a project that will generate tax credits, you should consider contacting a broker if you intend to monetize them. As brokers, we like to get involved and assist you as early as we can in the process. By having more time to assess your tax credit equity needs and actively market your credits, Clocktower Tax Credits can work to try to find the right investor for you and maximize the net price that you will receive after the sale has occurred. Please do not hesitate to call us at any time in the process.
Our institutional investors typically want to acquire tax credits in excess of $100,000 in face value. For tax credits smaller than $100,000, Clocktower Tax Credits can package a number of similar credits together in order to create the scale necessary to attractor investor interest. Large tax credit sales include 10-year credit streams approaching $50-100 million.
Tax credit pricing is determined by the marketplace. Factors such as the size of a credit, the type of credit, where a credit is issued and the programs through which the credit are offered can all affect the price. Transferable tax credits are priced with a cents-per-dollar of credit purchase price. Allocable partnership credits are typically priced to after-tax annualized internal rate of return, which factor in price, timing, annual costs, tax attributes and exit costs.
Because we are in the tax credit marketplace every day, working with buyers and sellers nationwide, Clocktower Tax Credits knows the pricing for most credits. Feel free to contact us to learn what your tax credits are worth.