Structuring Solar Projects to Maximize Tax Subsidies Solar Energy - PowerPoint PPT Presentation

Structuring Solar Projects to Maximize Tax Subsidies Solar Energy Investments and the Green Stimulus Plan Arnold E. Grant March 4, 2009

Importance of Tax Benefits to Solar Projects � Tax benefits necessary to make solar projects competitive with conventional power � Federal tax benefits equal approximately 60% of project cost � Primary tax benefits – Investment Tax Credit Under Section 48 – Accelerated Depreciation Under Section 168

Investment Tax Credit � 30% of cost of eligible solar property – Equipment used to generate electricity – Solar heating and cooling systems (at least 75% of energy source must be sunlight, allocation if less than 100%) – solar lighting – equipment used to heat swimming pool, greenhouses, solariums, roof ponds, glazing, mass or water Trombe walls don’t qualify � Applies to reduce alternative minimum tax in years that begin after October 3, 2008 � 1 year carryback, 20 year carryforward

Placed in Service � Less important given ITC extension � Condition and readiness for use – Licenses and permits – Pre-operational tests – Physical construction and installation (including interconnection) – Daily operation

ITC Limitations � Five year recapture period � Domestic use by U.S. persons � No tax-exempt use property � Original use – 80-20 test for new equipment – 3 month sale-leaseback window � Elimination of reduction for subsidized energy financing

Cash Grants in Lieu of Credit � Slowing market partially due to lack of tax appetite � Recovery Act permits election to receive cash in lieu of credit – 30% of basis � Applies to property placed in service during 2009 or 2010 � Credit to be paid within 60 days of earlier of date of application and date of property is placed in service

Cash Grants in Lieu of Credits – Limitations Relating to Payee � No payments to specified entities � Federal, state or local governments or agencies � Tax-exempt entities described in 501(c) � Co-operative electric companies qualified issuers of specified energy bonds � Pass through entities with members described above � Foreign taxpayers ok?

Cash Grants in Lieu of Credit – Limitations Similar to ITC � Five year recapture period � Property used outside United States � Property used by tax-exempt organizations � Property used by governmental units or foreign persons or entities

Accelerated Depreciation � Basis reduced by 50% of cash grant/ITC � 50% bonus depreciation on property placed in service during 2009 (through 2010 for certain assets) � Five years MACRS generally applies � Tax appetite required

A Partnership Flip Developer Investor 1% pre-flip 99% pre-flip 95.05% post-flip 4.95% post-flip Partnership cash grant/ITC plus Power depreciation Power Purchaser Sales � Investor receives cash grant/ITC plus depreciation � Flip occurs after investor receives IRR but not within first five years � Developer generally has purchase option after flip � Capital account or outside basis issues

Traditional Sale-Leaseback Investor Project Sale Developer SPV Power Purchaser cash grant/ITC Power plus depreciation Sales Leaseback � Developer generally has option to acquire property at end of lease term � Lease must qualify as true lease for tax purposes

Modified Sale-Leaseback Tax Investor Project Sale Developer Power Purchaser Receives ITC/ SPV cash grant Power (depreciation) Sales Leaseback � No basis reduction as a result of ITC/cash grant � Developer must take half the credit/cash grant into income over five year period � Lease must qualify as true lease for tax purposes � Lease must qualify for credit pass through election

Inverted Lease Investor Power Sales Developer lease SPV Power (Receives receives ITC/cash grant Purchaser Depreciation) rent � No basis reduction as a result of ITC/cash grant � Investor must take half the credit/cash grant into income over five years � Lease must qualify as true lease for tax purposes � Lease must qualify for credit pass through election

Prepaid Power Purchaser Agreement Power Purchase Agreement Project Company Power Purchaser prepayment for power � Project company financed through sale- leaseback or partnership flip � Income deferred until power delivered � Structure needs to be consistent with true lease rules

Lease in Lieu of Power Purchase Agreement Lease Project Company Power User Rent � Project company financed through sale- leaseback or partnership flip � Considerations similar to other structures

Direct Ownership Owner uses or sells power � Simplest structure � Owner gets depreciation, ITC/cash grant � Can self-finance, take on debt or use prepaid PPA � Must operate or contract out

Partnership Flip (Rev. Proc 2007-65) � Wind Rev. Proc., should apply to solar � Advance ruling purposes only � Minimum 1% interest at all times during partnership � Smallest interest held by investor during term must be at least 5% of largest interest held by such investor during term � At least 75% of capital contribution must be non- contingent � Fair market value purchase option ok but only after five years � No puts � No credit guarantees

True Lease Criteria � Benefits and burdens of ownership � Significant equity investment � Residual value � Residual life � Options � Special use property � Pre-tax profit � Residual value guarantees � Rev. Proc. 2001-28

Special Considerations Where Power Purchaser is Government Entity, Exempt Organization or Foreign Person � Need to avoid IRS re-characterization of power purchase agreement as lease � Safe harbor under 7701(e)(3) � Power buyer cannot operate facility � Power buyer cannot bear significant financial burden of nonperformance (unless reasons beyond control of service provider) � Power buyer cannot receive significant financial benefits if operating costs of facility are less than anticipated � No options (except fair market value)

Concluding Thoughts � Tax benefits are substantial and important � Numerous structures are available for moving tax benefits among parties � Parties must “run the numbers” to determine optimal structure given their own circumstances

Tax Credit for Investment in Advanced Energy Facilities � 30% credit for investment in eligible property used in a qualified advanced energy manufacturing project � Qualified advanced manufacturing project is defined as a project which re-equips, expands or establishes a manufacturing facility for the production of property designed to be used to produce energy from specified sources, including the sun � Eligible property is tangible property (not including a building and its structural components) used as an integral part of the qualified advanced energy project

Obtaining the Credit � Projects must be certified � Treasury and DOE required to develop certification program by middle of August � $2.3 billion in credit availability � Applications within 2 years of adoption of certification program � 1 year from acceptance to meet certification criteria � 3 years from certification to place property in service

Selection Criteria � Commercial viability � Domestic job creating during credit period � Avoiding or reducing air pollutants or greenhouse gas emissions � Potential for technological innovation and commercial deployment � Lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emission � Shortest project time from certification to completion

Questions? Arnold E. Grant +1 312 207 2423 agrant@reedsmith.com