Clean Renewable Energy Bonds were federal tax credit bonds that financed renewable energy projects built by public power providers, governments, and electric cooperatives. Instead of paying cash interest, the issuer delivered a federal income tax credit to the bondholder on four fixed dates each year. Congress repealed the authority to issue new bonds of this kind in the Tax Cuts and Jobs Act of 2017, effective for bonds issued after December 31, 2017, but bonds issued before that cutoff continue to pay credits to their holders until they mature.1Internal Revenue Service. Instructions for Form 8912 – Credit to Holders of Tax Credit Bonds
How the Credit Replaced Cash Interest
A conventional municipal bond pays periodic cash interest, often exempt from federal tax. A CREB worked the other way around. The issuer paid little or no cash interest, and the bondholder instead received a federal income tax credit on each quarterly credit allowance date: March 15, June 15, September 15, and December 15.2Internal Revenue Service. Frequently Asked Questions on Qualified Tax Credit Bonds and Specified Tax Credit Bonds That credit was the investor’s yield.
The credit rate was not fixed by the bond itself. The Treasury Department set it at a level estimated to let the issuer sell the bonds at face value without paying cash interest.2Internal Revenue Service. Frequently Asked Questions on Qualified Tax Credit Bonds and Specified Tax Credit Bonds Beginning in January 2009, that estimate was pegged to yields on outstanding investment-grade bonds rated between A and BBB.3TreasuryDirect. Clean Renewable Energy Bond Rates
Because the issuer owed no cash interest, almost all of the money raised went into the project rather than into debt service. That was the whole point. Renewable energy facilities with long payback periods and modest revenue projections could be built with cheaper capital than a conventional taxable or tax-exempt bond would provide.
Original CREBs and New CREBs
Two generations of these bonds exist in the wild. The original CREBs were created by the Energy Tax Incentives Act of 2005 under IRC Section 54 and delivered the full credit rate to bondholders.4U.S. Department of Energy. Qualified Energy Conservation Bonds and New Clean Renewable Energy Bonds Primer The second generation, called New CREBs, was authorized under IRC Section 54C by the Energy Improvement and Extension Act of 2008 and pays only 70 percent of the otherwise-applicable rate.5Bloomberg Tax. 26 USC 54C – New Clean Renewable Energy Bonds If the full rate on a bond would produce a $1,000 annual credit, a New CREB holder receives $700.
The reduction was a compromise. Congress wanted to extend the program and expand the volume cap while cutting the per-bond subsidy cost. On the investor side, the smaller credit made New CREBs less attractive, and issuers sometimes paired the credit with a small cash coupon to move the bonds.
Who Could Issue the Bonds
The statute limited eligible issuers to a defined set of public-purpose electricity providers:
- Governmental bodies, including states, territories, the District of Columbia, Indian tribal governments, and their political subdivisions.
- Public power providers, meaning government-owned utilities that generate or distribute electricity.
- Cooperative electric companies, including mutuals and cooperatives that received loans under the Rural Electrification Act.
- Clean renewable energy bond lenders, meaning cooperatives owned by, or with loans outstanding to, at least 100 cooperative electric companies, provided the lender existed as of February 1, 2002.
6Internal Revenue Service. Instructions for Form 8912 – Credit to Holders of Tax Credit Bonds Private companies and investor-owned utilities were not eligible. The program was aimed at entities that had no federal tax liability to offset and therefore couldn’t use the production or investment tax credits available to for-profit developers.
What Projects Qualified
Bond proceeds had to finance “qualified renewable energy facilities,” defined by cross-reference to IRC Section 45(d). That list covers wind, solar, geothermal, closed-loop and open-loop biomass, municipal solid waste, qualified hydropower, and marine and hydrokinetic energy.7Office of the Law Revision Counsel. 26 USC 45 – Electricity Produced from Certain Renewable Resources Landfill gas qualified under the broader solid waste category.
The facility had to be owned by an eligible issuer or a qualified borrower. For New CREBs, 100 percent of the “available project proceeds” had to be spent on capital expenditures for the qualifying project. That figure is calculated after subtracting issuance costs, which are capped at 2 percent of proceeds, and after adding any investment earnings on the proceeds.2Internal Revenue Service. Frequently Asked Questions on Qualified Tax Credit Bonds and Specified Tax Credit Bonds
Tax Treatment for Bondholders
CREBs do not behave like ordinary tax-exempt municipal bonds, and three features in particular catch investors off guard.
The Credit Is Taxable Income
Under IRC Section 54A(f), the tax credit is treated as interest includible in the bondholder’s gross income.8GovInfo. 26 USC 54A – Credit to Holders of Qualified Tax Credit Bonds A $1,000 credit means reporting $1,000 of income. At a 35 percent marginal rate, the additional tax is $350, leaving a net benefit of $650. At 24 percent, the net is $760. After-tax value depends entirely on the holder’s bracket.
The Credit Is Not Refundable
The credit can zero out a year’s tax liability but cannot generate a refund. For holders of qualified tax credit bonds like New CREBs, any unused portion carries forward to the next tax year and adds to that year’s allowable credit. There is no carryback. Holders of original CREBs issued under the older Section 54 could instead take the unused credit as a deduction in the current or following year.1Internal Revenue Service. Instructions for Form 8912 – Credit to Holders of Tax Credit Bonds Investors with volatile income can find the credit worth less in low-tax years.
How to Claim It
Bondholders claim the credit on IRS Form 8912, “Credit to Holders of Tax Credit Bonds,” for each year they held the bond on a credit allowance date.1Internal Revenue Service. Instructions for Form 8912 – Credit to Holders of Tax Credit Bonds The credit equals the bond’s face amount multiplied by the applicable credit rate and the fraction of the year the bond was held. For New CREBs, that product is then multiplied by 70 percent.9Internal Revenue Service. IRS Form 8912 – Credit to Holders of Tax Credit Bonds
The Direct-Pay Election for Issuers
The HIRE Act of 2010 offered issuers of New CREBs an alternative to the pass-through credit. An issuer could make an irrevocable election to receive a direct payment from the Treasury and pay taxable interest to investors instead.10Internal Revenue Service. TEB Phase II – Lesson 11 Qualified Tax Credit Bonds The Treasury reimbursement equaled 70 percent of the lesser of the actual interest paid or the interest that would have been payable at the applicable credit rate.
The election solved a real market problem. Many tax credit bonds struggled to find enough investors with the tax liability to absorb the credits. Converting the subsidy into cash to the issuer opened the bonds to a broader investor base, including tax-exempt institutions and pension funds that had no use for a federal income tax credit.
What Replaced CREBs
The Tax Cuts and Jobs Act of 2017 repealed IRC Sections 54 and 54A through 54F, ending the authority to issue any new tax credit bonds after December 31, 2017.1Internal Revenue Service. Instructions for Form 8912 – Credit to Holders of Tax Credit Bonds Bonds validly issued before that date remain outstanding and continue to deliver credits on each allowance date until they mature or are redeemed.
Public power providers and governments looking to finance renewable projects today generally turn to the “elective pay” mechanism created by the Inflation Reduction Act of 2022, sometimes called direct pay. It allows tax-exempt and governmental entities, including state and local governments, tribal governments, school districts, and other political subdivisions, to claim the full cash value of certain clean energy tax credits despite owing no federal income tax. For renewable generation, the relevant credits include the Production Tax Credit for Electricity from Renewables, the Clean Electricity Production Tax Credit, the Investment Tax Credit for Energy Property, and the Clean Electricity Investment Tax Credit. Entities must complete pre-filing registration with the IRS and place the project in service before making the election.
The shift reflects a lesson from the CREB experience. Tax credit bonds required finding investors with enough tax liability to use the credits, which limited the market and sometimes forced issuers to accept unfavorable terms. Elective pay sends the subsidy directly to the entity building the project, making the economics simpler and more predictable than CREBs ever offered.