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
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