We were pleased to participate in Power Finance & Risk’s (PFR) Tax Equity Roundtable. We were joined in the roundtable discussion by Rich Dovere of C2 Energy Capital, Marshal Salant of Citi, Kathyrn Rasmussen of Capital Dynamics Clean Energy and Infrastructure, Pedro Almeida of EDP Renewables North America and as moderator PFR’s editor, Richard Metcalf. The topics covered included tax equity structuring, tax reform, tax equity syndication and the challenges and opportunities associated with distributed generation solar. We are pleased to be able to make available to our readers PFR’s report: PFR Tax Equity.
Jeffrey G. Davis is a partner in the Tax Transactions & Consulting group in Mayer Brown’s Washington DC office and is a co-head of the firm’s Renewable Energy group. Jeff represents major corporations, financial institutions and private equity funds on a wide range of US federal income tax matters. His practice focuses on partnership tax, tax credits and other incentives, and project finance and development.
Mayer Brown’s David K. Burton and Jeffrey G. Davis both Tax Transactions & Consulting partners and part of the firm’s Renewable Energy group co-hosted a heavily attended webinar on how tax reform is impacting the tax equity market and certain renewable energy structures with Vadim Ovchinnikov, CFA, CPA and Gintaras Sadauskas of Alfa Energy Advisors. Topics addressed, included: The latest industry trends such as, the feds raising interest rates; the increase in project M&A activity for both development and operating assets; plans for large offshore wind projects in several east coast states; changes in PPA’s and revenue models; compressed margins and why developers and investors are moving towards commercial and industrial (C&I) solar projects. Additional topics, included:
- New bonus depreciation rules and impact on tax equity transactions and modeling;
- Compressed financing margins for wind and solar;
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects; and,
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies.
Over 480 clients and contacts registered for the co-hosted webinar. Due to the volume of interest and post-presentation questions, we would like to share the slides from the presentation: webinar presentation.
We are reviewing and preparing responses to all of the questions that were submitted electronically during the webinar. We will be sharing those questions with our answers in a subsequent blog post.
Please join Mayer Brown and Alfa Energy Advisors for a webinar. The webinar will address how tax reform is impacting the tax equity market and certain structures in particular. Additional topics include:
- The latest industry trends
- New bonus depreciation rules and their impact on tax equity transactions and modeling
- Compressed financing margins for wind and solar
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies
CLE credit is available.
Tuesday, October 23, 2018
1:30 p.m. – 3:30 p.m. EDT
12:30 p.m. – 2:30 p.m. CDT
11:30 a.m. – 1:30 p.m. MDT
10:30 a.m. – 12:30 p.m. PDT
8:30 p.m. – 10:30 p.m. CEST
7:30 p.m. – 9:30 p.m. BST
We have published our Legal Update on the Federal Circuit’s opinion in the Alta Wind case involving the calculation of eligible basis for 1603 Treasury cash grant purposes. The 1603 Treasury cash grant rules “mimic” the investment tax credit (ITC) rules, so the case has implications for ITC transactions being structured and end executed today. Our Legal Update is available here.
If you would like to read the Federal Circuit’s opinion, it is available here.
On June 22, 2018, the IRS released Notice 2018-59 (the “Guidance”). The Guidance provides rules to determine when construction begins with respect to investment tax credit (“ITC”) eligible property, such as solar projects. The Guidance was much awaited by the solar industry because the date upon which construction begins governs the determination of the percentage level of the ITC, which is ratcheted down for projects that begin construction after 2019.
In addition to applying to solar and (fiber-optic solar), the Guidance applies to the following energy generation technologies: geothermal, fuel cell, microturbine, combined heat and power and small wind.
Overview of Beginning of Construction
The ITC percentage for a solar project is determined based on the year in which construction of the project begins, provided the solar project is also placed in service before January 1, 2024, as follows: (i) before January 1, 2020, 30%, (ii) in 2020, 26%, (iii) in 2021, 22% and (iv) any time thereafter (regardless of the year in which the solar project is placed in service), 10%.
The Guidance is quite similar to existing guidance for utility scale wind projects. The utility scale wind guidance is discussed in our 2016 Update. As expected and consistent with the wind guidance, the Guidance provides two means for establishing the beginning of construction of a solar project (and other ITC technology projects): (i) engaging in significant physical work either directly or by contract the “Physical Work Method”) or (ii) paying or incurring (depending on the taxpayer’s method of accounting) five percent of the ultimate tax basis of the project (the “Five Percent Method”). As is the case with wind, the Guidance provides that the IRS will apply strict scrutiny of the facts and circumstances to determine if the project was continuously constructed from the deemed beginning of construction date through the date the project is placed in service.
Four Year Placed-in-Service Window
The wind guidance provides a four year window for the project to be completed and to avoid the scrutiny as to whether the construction was continuous. There had been speculation that the window for solar (or at least some classes of solar) would be shorter because the time to construct solar projects (especially rooftop solar) is generally shorter than the time to construct a wind project. In what is a relief to the solar industry, the Guidance provides solar, and the other ITC technologies, a four year window as well. Continue Reading Beginning of Construction Guidance for Solar and Other ITC Technologies
In a recent case, the Tax Court ruled in the taxpayer’s favor as to three California distributed generation solar projects’ eligibility for the energy credit under Section 48 and bonus depreciation under Section 168. However, the Tax Court did reduce the taxpayer’s basis in the projects, and the taxpayer in the case enjoyed significant procedural advantages due to mistakes by the IRS.
In Golan v. Commissioner, T.C. Memo. 2018-76 (June 5, 2018), in late 2010 a solar contractor installed solar equipment on the roofs of three host properties and entered into power purchase agreements (“PPAs”) with the property owners. The PPAs provided that the hosts would purchase electricity generated by the solar equipment at a discount to utility rates, while the solar contractor would retain the ownership of the equipment, including the right to any tax or other financial benefits, and would service and repair the equipment.
Mr. Golan, the taxpayer, in 2011 purchased the solar equipment, subject to the PPAs, from the solar contractor for a purported purchase price of $300,000, which was the sum of a purported $90,000 down payment, a $57,750 credit for certain rebates, and a $152,250 promissory note (which the taxpayer was the obligor under but the taxpayer also provided a personal guarantee thereof). The solar projects were not connected to the grid until after the taxpayer acquired them in 2011. The IRS unsuccessfully sought to disallow the taxpayer from taking energy credit and depreciation deduction with respect to the solar equipment. Continue Reading Tax Court Sustains Energy Credit and Bonus Depreciation for Distributed Generation Solar Projects
Pratt’s Energy Law Report has published our article 2018 and Onward: The Impact of Tax Reform on the Renewable Energy Market. We are pleased to be able to make a PDF version of the article available. (The article starts on page 6 of the PDF).
A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals? in its blog (subscription required) and newsletter. If you are unable to open the blog post, the text of the article is available below:
On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.
Corporate Tax Rate Reduced to 21%
In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.
Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.
100% Bonus Depreciation
A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation. Continue Reading What Is the Impact of Tax Reform on US Wind Tax Equity Deals?
Today, the House voted 227 to 303 in favor of the tax reform bill agreed to by the conference committee. No Democrats voted for the House bill, and 12 Republicans from high tax states voted against it. The Senate is expected to vote later this evening to approve it; it is possible that the president could sign the bill as early as tomorrow.
The enacted legislation is expected to be identical to the bill approved by the conference committee. Our analysis of the conference committee’s bill’s impact on the renewable energy market is below, which is followed by a chart that summarizes the relevant provisions in each of the three bills. Continue Reading House Passes Tax Reform & the Impact of Tax Reform on the Renewable Energy Market
The US tax reform bill that the Senate passed on December 2, 2017—along partisan lines in a 51 to 49 vote—is a mixed bag for the tax equity market. The bill is now headed to the conference committee, consisting of House of Representative and Senate leaders, to be reconciled with the tax reform bill passed by the House on November 16.
Below we describe the five differences from the House bill that are of greatest significance to the renewable energy tax equity market. (See also our prior analysis of the ramifications for the tax equity market of the House bill.)
Amounts of and Eligibility for Tax Credits
First, the amount of renewable energy tax credits available and the rules for qualifying for those credits are unchanged from current law under the Senate bill. Specifically, the inflation adjustment that applies to production tax credits is left in place and the “start of construction” rules are unchanged. The fact that the Senate bill left these provision alone is positive for wind and solar, which are in the midst of a phase-out, for wind, and a phase-down, for solar.
However, the Senate bill also left alone the lapsed tax credits for the “orphaned” renewable energy technologies that were inadvertently omitted from the 2015 extension that benefited wind and solar. The orphaned renewable energy technologies are fuel cells, geothermal, biomass, combined heat and power, landfill gas, small wind, solar illumination, tidal power and incremental hydroelectric.
Proponents of those technologies may have more negative views of the Senate bill. There is still discussion of the tax credits for the orphaned technologies being included in an “extenders bill” to possibly be taken up after the tax reform process is over. Continue Reading Senate’s Tax Bill’s Impact on the Tax Equity Market: Five Differences from the House Bill