EBC Solar Energy Seminar: Financing Solar Energy Projects 2011
EBC Solar Energy Seminar: Financing Solar Energy Projects
2011 Patrick M. Cox
April 27, 2011
Outline of Tax Aspects Coordinating Tax Planning with Current and Projected Tax Law – A Familiar Theme -
Understanding existing law
-
Predicting new law and extensions of existing law
Compliance with Safe Harbors Typical Tax Equity Structure -
Flip partnership
-
Sale-leaseback
-
Lease pass-through
2
Current Credit and Grant Regime Investment Tax Credit (“ITC”)
Grants in Lieu of ITC (“Grants”) Production Tax Credit (not applicable to solar projects)
3
Current Credit and Grant Regime
ITC -
IRC § 48
-
Credit based on the “energy percentage” (10% or 30%) of the basis of “energy property” placed in service before 2017
-
Currently 30% for solar property
“Energy property” includes certain fuel cell, solar, geothermal power production, small wind energy, combined heat and power system, and geothermal heat pump property
Denial or Recapture of ITC -
No ITC is available if a Grant is received
-
If ITC was received for a taxable year ending before a Grant is received, the amount of the allowed ITC is recaptured
-
General five-year recapture period for ITC
Disposition
Property ceases to be “energy property”
4
Current Credit and Grant Regime
Placed in Service -
Ready and available for its specific use
-
“Placed in service” is not synonymous with “used” (Northern States Power Company)
-
But, contrast Northern States Power (nuclear fuel assemblies were placed in service even though not yet in use) with Tierney (ethanol plants had to be complete and producing ethanol to be placed in service)
Active trade or business (Wall)
Examples (Treas. Reg. § 1.46-3(d)(2))
Parts are acquired and set aside during the taxable year for use as replacements for a particular machine (or machines) in order to avoid operational time loss
Operational farm equipment is acquired during the taxable year and it is not practicable to use such equipment for its specifically assigned function in the taxpayer's business of farming until the following year
Equipment is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects
5
Current Credit and Grant Regime
Grants in Lieu of ITC (“Grants”)
Cash grant equal to 10% or 30% of eligible cost basis
Government entities, tax-exempt entities, clean renewable energy bond lenders, cooperative electric companies, and pass-through entities with any of the aforementioned types of partners (collectively, “Disqualified Persons”) are ineligible
Blocker corporations can be used
Qualified property must be originally placed in service by the applicant between 2009 and 2011, or construction must begin between 2009 and 2011 and such property must be placed in service before the “credit termination date” (January 1 2013, 2014, or 2017)
30% for solar property
2017 for solar property
Construction begins when “physical work of a significant nature begins”
Physical work of a significant nature -
Physical work on the specified energy property at the site
-
Physical work that has taken place under a binding written contract
-
Non-continuous construction activity will be closely scrutinized
Safe harbor: 5% of total cost of the property has been paid or incurred -
Multiple units can be considered separately
Application deadline: must be received before 10/1/2012
6
Current Credit and Grant Regime
Recapture of Grants -
-
Disqualifying Event
Property disposed of to a Disqualified Person
Within 5 years of being placed in service, the property ceases to qualify as specified energy property (e.g., the property is used predominantly outside the U.S.)
Selling the property to a non-Disqualified Person should not result in recapture (property must continue to qualify as specified energy property and purchaser must agree to joint liability with respect to recapture)
Recapture Schedule
100% if the disqualifying event takes place within one year of the property being placed in service, reduced by 20% for each subsequent year (e.g., if the disqualifying event takes place 3 ½ years after the property is placed in service, the recapture amount would be 40% of the grant received)
7
Latest Prognostications for Future Tax Breaks New House of Representatives -
What the 2010 Lame Duck Session Taught Us
Illustrated the give and take between the parties (Bush-era tax cuts and bonus depreciation both extended)
Grant eligibility and application deadline extended for one year -
Indicates a desire to help the U.S. become a leader in renewable energy and reduce consumption of fossil fuels
-
Likely means further extensions
Future Incentives -
President Obama’s 2012 budget proposal provides another one-year extension of the Grants
-
Obama’s administration and renewable energy companies are pushing for more dependable incentives
8
Flip Partnership Structure
Rev. Proc. 2007-65: safe harbor for allocation of production tax credits to partners in accordance with IRC § 704(b)
Developer must have a minimum 1% interest in each material item of partnership income, gain, loss, deduction, and credit at all times
Each investor must have a minimum interest in each material item of partnership income and gain equal to 5% of the investor’s percentage interest in partnership income and gain for the taxable year for which the investor’s share of income and gain will be the largest, as adjusted for sales, redemptions, or dilution of its interest
Additional requirements generally (i) ensuring that an investor bears the risk of loss with respect to its investment, (ii) requiring a certain level of unconditional investment, and (iii) restricting the sale and purchase of interests in the project company and/or the property held by such company
Rev. Proc. 2007-65 states that it is only applicable to allocations of production tax credits from wind energy facilities
Structures involving solar energy facilities and the ITC will not expressly qualify for the safe harbor in Rev. Proc. 2007-65, but the IRS concerns are the same: -
Are the investors truly “partners”
-
Will the allocations be respected
9
Tax Equity Structure – Flip Partnerships
Loan Proceeds Fund General Partner
Lender Interest ITC Depreciation Cash Flow
Project Company
Developer Fee
Investor $ 100%
Operating Entities
10
Developer
Sale-Leaseback Structure 1. Property 2. Rent Payments
Fund I
Corporate Investor Lessor
Sale Price
Interest Payments
Developer Loan Proceeds
Energy Procurement Contract
Operating Entities
Tax Considerations -
Sham transaction/true sale
-
Rules with respect to Grants (see next page)
-
True lease (Rev. Proc. 2001-28)
11
Lender
System Integrator/ Installer
Sale-Leaseback Structure
Sale-Leaseback Transaction and Grants -
In a sale-leaseback transaction, the lessee may claim Grants if three conditions are satisfied:
The lessee originally placed the property in service;
The property must be sold and leased back by the lessee, or must be leased to the lessee, within three months after the date the property was originally placed in service; and
The lessee and lessor must not make an election to preclude application of the saleleaseback rules.
True Lease (Rev. Proc. 2001-28) -
Lessor unconditional minimum at-risk investment (20% equity)
-
Limitation on purchase and sale rights
-
Limitation on investment by lessee
-
Prohibition on lessee loans and guarantees
-
Lessor must demonstrate the expectation of profit apart from tax attributes arising from transaction
-
Leased property is not “limited use property”
12
Lease Pass-Through Structure Investor
Rent Developer/Owner
SPV Lease
Receives Depreciation Deductions
Receives ITC or Grants
Tax Considerations -
True lease (see previous slide)
-
Lessor/lessee eligibility (both lessor and lessee must be eligible to receive Grants)
13
Questions
and Answers
2011 Patrick M. Cox
April 27, 2011
Outline of Tax Aspects Coordinating Tax Planning with Current and Projected Tax Law – A Familiar Theme -
Understanding existing law
-
Predicting new law and extensions of existing law
Compliance with Safe Harbors Typical Tax Equity Structure -
Flip partnership
-
Sale-leaseback
-
Lease pass-through
2
Current Credit and Grant Regime Investment Tax Credit (“ITC”)
Grants in Lieu of ITC (“Grants”) Production Tax Credit (not applicable to solar projects)
3
Current Credit and Grant Regime
ITC -
IRC § 48
-
Credit based on the “energy percentage” (10% or 30%) of the basis of “energy property” placed in service before 2017
-
Currently 30% for solar property
“Energy property” includes certain fuel cell, solar, geothermal power production, small wind energy, combined heat and power system, and geothermal heat pump property
Denial or Recapture of ITC -
No ITC is available if a Grant is received
-
If ITC was received for a taxable year ending before a Grant is received, the amount of the allowed ITC is recaptured
-
General five-year recapture period for ITC
Disposition
Property ceases to be “energy property”
4
Current Credit and Grant Regime
Placed in Service -
Ready and available for its specific use
-
“Placed in service” is not synonymous with “used” (Northern States Power Company)
-
But, contrast Northern States Power (nuclear fuel assemblies were placed in service even though not yet in use) with Tierney (ethanol plants had to be complete and producing ethanol to be placed in service)
Active trade or business (Wall)
Examples (Treas. Reg. § 1.46-3(d)(2))
Parts are acquired and set aside during the taxable year for use as replacements for a particular machine (or machines) in order to avoid operational time loss
Operational farm equipment is acquired during the taxable year and it is not practicable to use such equipment for its specifically assigned function in the taxpayer's business of farming until the following year
Equipment is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects
5
Current Credit and Grant Regime
Grants in Lieu of ITC (“Grants”)
Cash grant equal to 10% or 30% of eligible cost basis
Government entities, tax-exempt entities, clean renewable energy bond lenders, cooperative electric companies, and pass-through entities with any of the aforementioned types of partners (collectively, “Disqualified Persons”) are ineligible
Blocker corporations can be used
Qualified property must be originally placed in service by the applicant between 2009 and 2011, or construction must begin between 2009 and 2011 and such property must be placed in service before the “credit termination date” (January 1 2013, 2014, or 2017)
30% for solar property
2017 for solar property
Construction begins when “physical work of a significant nature begins”
Physical work of a significant nature -
Physical work on the specified energy property at the site
-
Physical work that has taken place under a binding written contract
-
Non-continuous construction activity will be closely scrutinized
Safe harbor: 5% of total cost of the property has been paid or incurred -
Multiple units can be considered separately
Application deadline: must be received before 10/1/2012
6
Current Credit and Grant Regime
Recapture of Grants -
-
Disqualifying Event
Property disposed of to a Disqualified Person
Within 5 years of being placed in service, the property ceases to qualify as specified energy property (e.g., the property is used predominantly outside the U.S.)
Selling the property to a non-Disqualified Person should not result in recapture (property must continue to qualify as specified energy property and purchaser must agree to joint liability with respect to recapture)
Recapture Schedule
100% if the disqualifying event takes place within one year of the property being placed in service, reduced by 20% for each subsequent year (e.g., if the disqualifying event takes place 3 ½ years after the property is placed in service, the recapture amount would be 40% of the grant received)
7
Latest Prognostications for Future Tax Breaks New House of Representatives -
What the 2010 Lame Duck Session Taught Us
Illustrated the give and take between the parties (Bush-era tax cuts and bonus depreciation both extended)
Grant eligibility and application deadline extended for one year -
Indicates a desire to help the U.S. become a leader in renewable energy and reduce consumption of fossil fuels
-
Likely means further extensions
Future Incentives -
President Obama’s 2012 budget proposal provides another one-year extension of the Grants
-
Obama’s administration and renewable energy companies are pushing for more dependable incentives
8
Flip Partnership Structure
Rev. Proc. 2007-65: safe harbor for allocation of production tax credits to partners in accordance with IRC § 704(b)
Developer must have a minimum 1% interest in each material item of partnership income, gain, loss, deduction, and credit at all times
Each investor must have a minimum interest in each material item of partnership income and gain equal to 5% of the investor’s percentage interest in partnership income and gain for the taxable year for which the investor’s share of income and gain will be the largest, as adjusted for sales, redemptions, or dilution of its interest
Additional requirements generally (i) ensuring that an investor bears the risk of loss with respect to its investment, (ii) requiring a certain level of unconditional investment, and (iii) restricting the sale and purchase of interests in the project company and/or the property held by such company
Rev. Proc. 2007-65 states that it is only applicable to allocations of production tax credits from wind energy facilities
Structures involving solar energy facilities and the ITC will not expressly qualify for the safe harbor in Rev. Proc. 2007-65, but the IRS concerns are the same: -
Are the investors truly “partners”
-
Will the allocations be respected
9
Tax Equity Structure – Flip Partnerships
Loan Proceeds Fund General Partner
Lender Interest ITC Depreciation Cash Flow
Project Company
Developer Fee
Investor $ 100%
Operating Entities
10
Developer
Sale-Leaseback Structure 1. Property 2. Rent Payments
Fund I
Corporate Investor Lessor
Sale Price
Interest Payments
Developer Loan Proceeds
Energy Procurement Contract
Operating Entities
Tax Considerations -
Sham transaction/true sale
-
Rules with respect to Grants (see next page)
-
True lease (Rev. Proc. 2001-28)
11
Lender
System Integrator/ Installer
Sale-Leaseback Structure
Sale-Leaseback Transaction and Grants -
In a sale-leaseback transaction, the lessee may claim Grants if three conditions are satisfied:
The lessee originally placed the property in service;
The property must be sold and leased back by the lessee, or must be leased to the lessee, within three months after the date the property was originally placed in service; and
The lessee and lessor must not make an election to preclude application of the saleleaseback rules.
True Lease (Rev. Proc. 2001-28) -
Lessor unconditional minimum at-risk investment (20% equity)
-
Limitation on purchase and sale rights
-
Limitation on investment by lessee
-
Prohibition on lessee loans and guarantees
-
Lessor must demonstrate the expectation of profit apart from tax attributes arising from transaction
-
Leased property is not “limited use property”
12
Lease Pass-Through Structure Investor
Rent Developer/Owner
SPV Lease
Receives Depreciation Deductions
Receives ITC or Grants
Tax Considerations -
True lease (see previous slide)
-
Lessor/lessee eligibility (both lessor and lessee must be eligible to receive Grants)
13
Questions
and Answers
