Section 48E Recapture Risk: What Buyers Need to Verify Before Closing a Deal

For buyers acquiring Section 48E clean electricity investment tax credits, recapture risk is the diligence item that gets the most scrutiny and, historically, produces the fewest actual claims. That balance is shifting slightly. The One Big Beautiful Bill Act (OBBBA) layered a new, longer-dated recapture exposure on top of the traditional five-year rule, and buyers who treat 48E diligence as a copy-paste of legacy Section 48 checklists risk missing it. Here is what still applies, what is new, and what a buyer should confirm before a transfer agreement is signed.

The Standard Five-Year Recapture Window

Section 48E credits remain subject to the recapture framework Congress has long applied to investment tax credits: rules similar to those under Section 50(a). If a facility ceases to qualify as investment credit property within five years of being placed in service, the IRS can claw back a portion of the credit already claimed. Triggering events generally include a disposition of the property, a change of ownership, or the facility ceasing to be used for its qualifying purpose, such as generating electricity.

The claw back is not all-or-nothing across the full window. The recaptured percentage steps down each year the property remains in qualifying service, reaching zero once the five-year period has run. A forced disposition, such as a lender foreclosure following a loan default, can trigger recapture just as readily as a voluntary sale, which is why buyers have long focused diligence on capital structure and

 lender behavior rather than only on the sponsor’s intentions.

A Second, Longer-Dated Exposure: FEOC Effective-Control Payments

OBBBA introduced a separate and more severe recapture rule tied to the new foreign entity of concern (FEOC) restrictions. For Section 48E specifically, if a taxpayer makes a payment to a specified foreign entity (SFE) that grants that entity “effective control” over the facility, and that payment occurs within ten years of the facility being placed in service, the IRS can recapture the entire credit previously claimed. There is no step-down: the exposure is full value, not a declining percentage.

This recapture rule applies to credits allowed in taxable years beginning more than two years after OBBBA’s July 4, 2025 enactment, meaning tax year 2028 for calendar-year taxpayers. Because the ten-year recapture clock runs from a facility’s placed-in-service date while the rule’s own effective date is tied to the taxable year in which the credit is allowed, buyers should confirm with counsel exactly how the two dates interact for any specific facility, particularly ones placed in service well before 2028. “Effective control” is defined broadly enough to capture certain licensing and operating agreements, not only ownership stakes, which is why sponsors’ ongoing contracts with technology and equipment counterparties matter for the full ten-year period, not just at closing.

The practical effect is that a Section 48E credit now carries two recapture clocks running on different tracks: the familiar five-year property-based window, and a newer, longer ten-year window tied to who the facility does business with. A buyer’s diligence has to account for both.

What Diligence Should Actually Cover

Before closing, buyers and their advisors typically confirm a set of items across both recapture windows:

• Placed-in-service substantiation and cost segregation documentation supporting the claimed basis.
• The project’s debt structure, including lender covenants and whether forbearance agreements exist that would prevent a lender from foreclosing directly on the property during the recapture period.
• The creditworthiness of the seller or sponsor, which determines how much an indemnification obligation is actually worth if a recapture event occurs.
• Prevailing wage and apprenticeship compliance records, tracked separately from recapture but generally requested as part of the same diligence package.
• FEOC and prohibited foreign entity (PFE) screening of the sponsor’s ownership, board composition, and any licensing or technology agreements that could be read as conferring effective control to a specified foreign entity.
• Confirmation of which recapture window, or windows, actually apply given the facility’s placed-in-service date and the taxpayer’s taxable year.

Contractual and Insurance Protections

The IRS has confirmed there is no prohibition on indemnification clauses in transfer agreements, and most transfer agreements now include a broad seller indemnity covering recapture, along with any associated penalties and interest, regardless of fault. Where the seller is a thinly capitalized project-level entity, buyers frequently ask for a parent guarantee from the sponsor to back that indemnity.

Tax credit insurance is the other common layer, typically covering recapture, credit qualification, and basis, with the premium usually paid by the seller. Buyers should also expect ongoing covenants: sellers agreeing not to take actions that would trigger recapture, providing periodic compliance certificates, and notifying the buyer promptly if a recapture event occurs so it can be reflected on the buyer’s return and, where applicable, an insurance or indemnification claim can be made. Given the new ten-year FEOC layer, these covenants increasingly need to extend well past the traditional five-year monitoring period.

The Takeaway for Buyers

Recapture events remain uncommon relative to the overall volume of transferred credits, and most reported instances have been partial and tied to property damage rather than a change of ownership. But the consequences are high enough, and the FEOC-related exposure novel enough, that verifying both recapture windows before closing is worth the diligence time. As a facilitator connecting tax credit buyers, sellers, and the advisors who structure these transactions, Fallbrook Financial Services helps clients understand the needs for both the buyer and seller of the transferable credits and helps guide both parties through their paperwork to ensure a seamless transfer.  Fallbrook does not act as a broker-dealer or investment adviser, and buyers should work with qualified tax counsel to evaluate recapture exposure specific to any individual transaction.

Sources

1. Cornell Law School, Legal Information Institute — 26 U.S. Code § 48E — https://www.law.cornell.edu/uscode/text/26/48E

2. Crux — What is recapture risk in tax credit transactions? — https://www.crux.com/blog/what-is-recapture-risk-in-tax-credit-transactions

3. Bracewell LLP — FEOC Rules for Clean Energy Tax Credits — https://www.bracewell.com/resources/feoc-material-assistance-rules-clean-energy-tax-credits/

4. Novogradac — Navigating the New Energy Landscape: FEOC and Beginning of Construction Rules — https://www.novoco.com/notes-from-novogradac/navigating-the-new-energy-landscape-what-you-need-to-know-about-the-foreign-entities-of-concern-and-beginning-of-construction-rules-for-section-48e-45y-and-45x-tax-incentives

5. Gibson Dunn — Focus on Clean Energy Tax Provisions in the One Big Beautiful Bill Act — https://www.gibsondunn.com/focus-on-clean-energy-tax-provisions-in-the-one-big-beautiful-bill-act/

6. Baker Tilly — Understanding foreign entity of concern (FEOC) provisions in the OBBBA of 2025 — https://www.bakertilly.com/insights/understanding-foreign-entity-of-concern

7. Grant Thornton — IRS guidance on tax credit transfers reveals risks — https://www.grantthornton.com/insights/alerts/tax/2023/flash/irs-guidance-on-tax-credit-transfers-reveals-risks

8. Norton Rose Fulbright — Tax Credit Insurance Mitigates Risk for Tax Credit Transfers — https://www.projectfinance.law/tax-equity-news/2023/may/tax-credit-insurance-mitigates-risk-for-tax-credit-transfers-but-due-diligence-is-still-necessary/

9. PV Tech — Risk mitigation and due diligence in tax credit transactions — https://www.pv-tech.org/risk-mitigation-and-due-diligence-in-tax-credit-transactions/

10. Tax Notes — Due Diligence and How to Prepare for Tax Credit Transfer Audits — https://www.taxnotes.com/lr/resolve/featured-analysis/due-diligence-and-how-to-prepare-for-tax-credit-transfer-audits/7m6hv

11. Bloomberg Tax — New Clean Energy Tax Credit Rules Transfer Deal Risks to Buyers — https://news.bloombergtax.com/tax-insights-and-commentary/new-clean-energy-tax-credit-rules-transfer-deal-risks-to-buyers

12. Basis — Buying Tax Credits: Guidance for Corporate Tax and Finance Leaders — https://www.buildwithbasis.com/insights/buying-tax-credits-guidance-for-corporate-tax-and-finance-leaders

Disclaimer

This article is provided for general informational purposes only and does not constitute tax, legal, financial, or investment advice. Fallbrook Financial Services acts solely as a facilitator and intermediary in tax credit transactions and is not a broker-dealer or investment adviser. Tax credit rules, including recapture provisions under Sections 48E, 50, and related FEOC/PFE regulations, are complex and subject to change; readers should consult qualified tax counsel and other professional advisors regarding their specific circumstances before entering into any transaction.