When purchasing a tax credit, there are two primary factors that drive the financial benefit of the transaction: discount and timing. Most buyers intuitively grasp the discount - the difference between the face value of the credit and the price you pay - because it's straightforward and easy to quantify. However, timing - when you pay for a tax credit relative to when you can use it - often gets overlooked despite being equally critical, if not more so.

Understanding the nuances of timing can fundamentally reorient how buyers approach tax credit purchases, driving improved optimization of their overall tax strategies.

While the considerations discussed here apply broadly to both individuals and corporations, this article focuses specifically on corporate buyers, who have the added advantage of offsetting their quarterly estimated tax filings. For simplicity and clarity, we'll assume both the buyer and seller operate on calendar-year tax schedules ending December 31.

Before we dig into detailed scenarios, let's briefly cover some foundational concepts.

Section 1: Timing Basics

When is a tax credit earned?

A tax credit is officially earned on the day the underlying asset is placed-in-service (PIS), meaning it has completed construction and is now generating power to the offtaker. The calendar year during which a project is placed-in-service determines the tax year for which the credit is valid. For example, if Project X is placed-in-service on May 1, 2025, then the associated tax credit will specifically offset taxes for the 2025 tax year.

It’s important to note that a tax credit cannot technically be transferred before the PIS date. Using the example above, buyers looking to use Project X’s credits to offset their 2025 tax liability could only officially absorb/transfer those credits after May 1, 2025.

Having said that, buyers are permitted to enter into contractual purchase agreements in advance and typically it is significantly more advantageous to do so. Contracting early results in better pricing and more favorable terms because buyer demand is far lower relative to seller supply earlier in the year, resulting in greater buyer leverage. The converse is also true when buyers wait until later in the tax year to transact - in recent times, we’ve even seen demand outstrip supply by as much as 5 times towards the later part of the year. We know that this advanced commitment may make buyers feel uneasy as they have less certainty on their final tax bill (and therefore credit appetite) but in most cases we’ve seen the pros outweigh the cons.

Contract vs. Cash vs. IRS

Understanding the interplay between the date of contractual commitment, cash flow timing, and IRS recognition of credits is critical for optimizing tax credit purchases:

• Commitment date (contractual): You can execute a binding tax credit transfer agreement (TCTA) at any time, including before the project is placed-in-service. This contractual agreement sets the purchase terms, credit pricing, and outlines both parties' obligations, but it does not yet trigger any tax implications or payments.
• Funding window (cash): Cash payments for tax credits must occur within a specific period. The earliest a buyer can fund the purchase is January 1 of the credit’s applicable tax year. The latest possible funding date depends on tax filing deadlines: either the regular tax filing deadline (April 15 of the following year) or, if both the buyer and seller file extensions, the extended deadline (October 15 of the following year). This funding flexibility can significantly impact cash flow planning.
• Utilization date (IRS recognition) - critical and often overlooked: Once the project reaches its placed-in-service date, the buyer immediately gains eligibility to use the credit to offset quarterly estimated tax filings even if the cash payment hasn't been made yet. This critical point empowers corporations to strategically manage liquidity and optimize tax payment schedules, often leading to substantial financial benefits.

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‍Carryback & carryforward mechanics

A notable advantage of clean energy tax credits is their flexibility under U.S. tax law, specifically 26 U.S.C. § 39(a)(4), which allows credits to be carried back three years and carried forward 22 years, providing flexibility if ever a buyer overpurchased a tax credit in a given year.

For example, suppose you purchase a $4 million tax credit applicable to 2025 but only absorb $3 million of it within that year. The remaining $1 million is not lost, instead, you have two options:

• Carryforward: You may carry the unused $1 million forward into future tax years (starting with 2026). While this ensures the full use of your credit, delaying usage inherently diminishes its financial benefit due to the loss of the time value of money.
• Carryback: Alternatively, you can retroactively apply the excess credit against taxes from prior years. Note however, that IRS rules explicitly dictate the order in which credits can be applied. First to the earliest year, then two years prior, and finally the immediately prior year. So in our example, first to 2022, then any excess to 2023, and finally any excess to 2024. Buyers need to weigh the administrative effort of amending prior-year returns against potential financial gains. Engaging in this strategy typically makes sense if the financial advantage clearly justifies the administrative burden so buyers must ask themselves “is the juice worth the squeeze?!”

Section 2: Illustrative Cash-Flow Scenarios

Base-case: Cash-only tax payments

Consider a straightforward example: Acme Corp. expects a Q2 2025 estimated tax liability of $4 million. On June 15, 2025, Acme will pay this full amount directly to the IRS through its standard quarterly estimated tax payments processes.

Pay now, save now: Buying tax credits just before a tax installment

In this scenario, Acme Corp enters into a Tax Credit Transfer Agreement (TCTA) with Seller X on June 1, 2025 to purchase their $4 million tax credit at a 10% discount (costing $3.6 million). The credit-generating project has just been placed-in-service on May 1, 2025.

Upon closing on June 1, Acme pays Seller X $3.6 million in cash to acquire their $4 million tax credit. This payment occurs 14 days before the company’s regular tax payment would have been due to the IRS on June 15. Thus, instead of paying $4 million directly to the IRS, Acme’s effective and annualized yield from this tax credit purchase can be calculated as:

• Effective yield: $4 million credit for a cost of $3.6 million equates to an 11.11% yield.
• Annualized yield: Annualizing this yield (assuming 14 days between the purchase and normal IRS payment date) provides an even clearer view of the benefit: 365 days / 14 days x 11.11% = 290%.

This highlights the substantial benefit of timing your tax credit purchase just before a tax installment is due.

‍Commit now, pay later: Offsetting early funding late

Alternatively, imagine Acme Corp proactively entering into a TCTA with Seller X in February 2025. Leveraging transaction certainty, the buyer negotiates a better discount of 12% on the same $4 million tax credit and secures favorable payment terms, delaying the cash outlay to July 30, 2025.

In this scenario, Acme immediately applies the full $4 million tax credit against their Q2 2025 estimated tax payment (due in June) but delays the actual payment of $3.52 million until several weeks later. This strategy provides an immediate boost to cash flow, acting as a powerful liquidity management tool. Additionally, Acme realizes direct savings of $480,000 at the time of payment. In fact, due to the delayed payment after utilizing the credits, the effective yield here would be considered infinite!

Historically, many buyers preferred to acquire tax credits at the time of their final tax filings - often at the extended filing deadline (e.g., purchasing 2024 credits by October 15, 2025). However, as the tax credit market matures, corporate buyers are increasingly adopting proactive strategies like “pay now, save now” and when available, the highly optimal “commit now, pay later” approach.

Section 3: Specific Situations & Edge-Cases

End of year credit slippage

Buyers should be cautious when purchasing tax credits with expected placed-in-service dates in late Q4. Even slight delays or "slippage" of the project’s PIS to the following calendar year will shift the tax credit eligibility entirely to the subsequent tax year. To address this risk, we've seen the following strategies commonly implemented:

• Tiered pricing: If a contracted tax credit portfolio decreases in size due to projects slipping into the subsequent year, pricing for the credits that remain in the original year improves. For example, if a $5 million 2025 portfolio originally priced at 92 cents per credit reduces to $4 million due to a $1 million slippage, the price for the remaining 2025 credits may improve to 90 cents per credit.
• Right of first refusal (ROFR): Granting buyers priority access to credits the following year at a further reduced price. For instance, if a buyer had agreed to purchase a 2024 tax credit at 92 cents on the dollar, but the project slips into 2025, they might receive a ROFR for the same credit at a discounted rate of 90 cents.

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‍Waiting until the latest possible date to buying a tax credit‍

As mentioned earlier, purchasing credits around your extended filing date (typically October 15) is a common practice - but it has clear drawbacks. Waiting until this late point not only means forgoing the earlier cashflow advantages discussed above, but also introduces additional liquidity inefficiencies. By this stage, corporations typically have already fully paid their estimated taxes to the IRS throughout the previous calendar year. Buying credits at the last moment requires an upfront cash outlay, followed by a final return to retroactively apply the credits, which triggers an IRS refund process that can take several months.

For example, suppose Acme Corp fully paid their $15 million 2024 tax liability via quarterly payments by early 2025. On October 10, 2025, they purchase $10 million in 2024 tax credits. Acme must first outlay cash for these credits, file their final return, and then await a refund from the IRS.

This refund process typically involves IRS review, processing, and issuance of the refund via direct deposit or check, causing a multi-month delay. Consequently, Acme effectively pays twice - once throughout 2024 and again upon purchasing credits before eventually “saving” anything by purchasing this tax credit. Clearly, this approach is significantly less optimal compared to the proactive, liquidity-focused strategies outlined earlier.

Conclusion

The value of purchasing tax credits extends far beyond simply reducing taxes by buying credits at a discount. Proactively managing when you contract, fund, and utilize these credits can significantly enhance cash flow and drive greater tax efficiency. Strategies like “pay now, save now” and “commit now, pay later” show how aligning contract, cash, and IRS recognition dates can yield double-digit - or even infinite! - yields. 

Mastering timing in tax credit transactions reinforces what we increasingly hear from CFOs and tax directors: “effective tax credit transfers have the power to transform tax departments from a cost to a profit center”.