IRA Incentive Due Diligence: Your 48-Hour Framework
IRA tax credit deals have real financial risk. Miscalculated eligible basis, missing prevailing wage records, or undisclosed recapture exposure can cost millions. This structured 48-hour framework gives finance teams the tools to verify, calculate, and document any IRA credit deal from initial review to signed purchase agreement.
Why Due Diligence Matters
The IRS treats IRA tax credits as self-certified by the taxpayer — there is no government pre-approval process. This means buyers and sellers of transferred credits must do their own verification. The consequences of failure are severe:
- Recapture: The IRS can claw back ITC if the project fails to meet credit requirements during the 5-year recapture period.
- Audit exposure: Overstated eligible basis or fraudulent prevailing wage certifications can trigger penalties of 20-40% of the overstated amount.
- Credit disallowance: Missing documentation for bonus adders (energy community, domestic content) results in disallowance of those adders without penalty but with significant value loss.
- Transfer liability: In a credit transfer, the buyer generally bears the tax consequences if a transferred credit turns out to be excessive, with an added penalty unless it can show reasonable cause (IRC §6418(g)), which is why buyers run their own diligence.
The 48-Hour Checklist
Project Classification & Credit Identification
- Identify technology type (solar PV, wind, storage, geothermal, etc.)
- Confirm applicable credit section (ITC §48E, PTC §45Y, 45Q, 45V, 48C; legacy §48 and §45 only for projects that began construction before 2025)
- Determine ITC vs. PTC election (both available for most generating technologies; storage is ITC-only)
- Map project GPS coordinates to energy community overlays (DOE interactive map)
- Map project census tract to low-income community categories (IRS LIC tool)
- Confirm project capacity (under 1MW AC for automatic prevailing wage satisfaction)
- Review project entity structure (LLC, C-corp, partnership)
Eligibility Verification
- Prevailing wage: Confirm construction contracts reference current DOL wage tables
- Prevailing wage: Collect certified payroll records from all contractors and subs
- Apprenticeship: Verify 15% of labor hours assigned to registered apprentices
- Apprenticeship: Confirm apprenticeship programs are registered with DOL or state agency
- Domestic content: Request manufacturer certifications for steel, iron, and manufactured products
- Domestic content: Apply the manufactured product threshold for the construction start year (40% before 2025, rising to 55% after 2026; lower for offshore wind)
- Energy community: Obtain official census tract designation documentation
- Wind and solar: Confirm construction began by July 4, 2026 under the Treasury Notice 2025-42 rules, or that the facility will be placed in service by December 31, 2027 (One Big Beautiful Bill Act)
- Confirm the project and its suppliers satisfy the foreign-entity-of-concern restrictions
- Confirm placed-in-service date (or projected date) aligns with credit year
Credit Calculation & Value Modeling
- Determine eligible basis (total project cost minus ineligible items: land, interconnection line > 50 feet)
- Apply applicable bonus adders: +10% energy community, +10% domestic content, +10/20% low-income
- Model ITC: (eligible basis × credit rate) to determine gross credit value
- Model PTC alternative: Project 10-year kWh production × 2.75¢/kWh (inflation-adjusted)
- Compare ITC vs. PTC NPV at applicable discount rate
- Obtain transferability pricing indications from 2-3 broker/platforms
- Model tax equity yield and compare net developer proceeds
- Account for MACRS depreciation if tax equity path is under consideration
Recapture Risk Assessment
- Review project operating agreement for disposition restrictions
- Confirm no planned asset sales within 5-year ITC recapture period
- Review project debt covenants for change-of-control provisions
- Assess force majeure and operational risk (natural disaster, permitting revocation)
- Obtain term sheets from 2-3 tax credit insurance providers
- Quantify recapture insurance cost (typically 0.5-1.5% of insured credit amount)
- Identify any related-party transactions in eligible basis that could trigger IRS scrutiny
- Review state tax credit implications and any state recapture provisions
Documentation Checklist
- Engineer or independent certifier confirmation of placed-in-service date
- Cost segregation study or qualified appraisal supporting eligible basis
- Certified payroll records for all construction labor (prevailing wage proof)
- Apprenticeship hour logs and registered apprenticeship program certificates
- Domestic content certifications from equipment manufacturers (signed)
- DOE or census bureau documentation confirming energy community / LIC status
- Interconnection agreement confirming project capacity and point of interconnection
- Final project operating agreement and entity formation documents
- Draft Form 3468 (ITC) or Form 8835 (PTC) with supporting calculations
- Draft Form 3800 transfer election (if using transferability)
Red Flags That Kill Deals
These issues have derailed real IRA credit transactions. If you encounter any of them, pause and get qualified tax counsel involved before proceeding:
Frequently Asked Questions
What is ITC recapture and how long does it last?
ITC recapture occurs when an ITC-eligible project is disposed of, ceases to qualify, or is transferred in a taxable transaction within 5 years of being placed in service. The recapture amount decreases by 20% per year: 100% in year 1, 80% in year 2, 60% in year 3, 40% in year 4, and 20% in year 5. After year 5, there is no recapture.
What documents are required for an IRA tax credit claim?
Required documentation includes: (1) engineer or third-party certification of placed-in-service date; (2) cost segregation study or qualified appraisal for eligible basis; (3) prevailing wage compliance records (certified payrolls, apprenticeship agreements); (4) domestic content certifications from equipment manufacturers; (5) energy community designation evidence (DOE maps, census tract data); (6) Form 3800 and applicable credit forms (e.g., Form 3468 for ITC).
What kills an IRA tax credit deal in due diligence?
Common deal killers include: (1) Missing prevailing wage payroll records with no ability to cure retroactively; (2) Equipment that does not qualify for domestic content due to foreign manufacturing (and no certification available); (3) Project entity structure that does not allow for clean credit transfer (existing tax equity investor with conflicting contractual rights); (4) IRS audit risk flags (related-party transactions in eligible basis, inflated cost certifications).
Can prevailing wage non-compliance be cured?
Yes, within limits. The statute provides a correction and penalty procedure (IRC §45(b)(7)(B), applied to the other credits, and the final prevailing wage regulations): the taxpayer pays affected workers the wage shortfall plus interest and pays a per-worker penalty to the IRS, with higher amounts where the failure was due to intentional disregard. Confirm the current amounts and deadlines with tax counsel, correct early, and document every payment.
How does IncentEdge help with IRA due diligence?
IncentEdge's verified catalog covers New York state, NYC and utility programs, plus federal credits. Each program links to its published source and shows the date it was last verified, which helps with the classification phase of this checklist. The eligibility verification, documentation and recapture work described here still has to be done for each deal.
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IncentEdge's verified catalog covers New York state, NYC and utility programs, plus federal credits, each with a link to its published source and the date it was last verified.
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