Tax Developments

1. Tax Developments Keith Martin kmartin@chadbourne.com

3. The Senate is expected to vote on Tuesday on a tax extenders bill that would extend production tax credits for wind farms by one year and for biomass, geothermal, landfill gas, marine and trash-burning plants by two years. It would also extend the 30% investment credit for solar projects for eight years and allow a 10% investment credit for new small cogeneration facilities put in service through 2016. It is not clear the House will go along. • adjournment • wind politics • utility solar

4. Tax equity is becoming increasingly hard to raise for renewable energy projects. Of the 14 large institutional investors who put money into renewable energy projects in the last two years, probably only half still have a tax base. Rates are increasing. Secondary market deals will soon be competing with original product. • Lehman

5. Rising construction costs are creating “absorption” issues in tax equity deals. “Capital account” and “outside basis” are two measures of what an investor put into a deal and what it can take out. They are limits on the amount of tax subsidy the investor can absorb. • DRO • nonrecourse debt • 200 bps

6. An IRS notice last July opens the door for utilities that buy renewable energy also to be allocated the tax subsidies from the projects. Production tax credits for wind, biomass and geothermal projects can only by claimed on electricity sold to an “unrelated person.” The IRS said a utility can own an interest in a project partnership, buy all the electricity and claim 99% of the tax benefits under the new IRS policy. • solar

7. One US wind farm was financed using a “prepaid service contract” structure. Another is in the market this fall, and several solar developers are also looking at the structure. In such a structure, the utility buying the electricity prepays for the P99 output. Its prepayment pays almost half the project cost. • benefits

8. The most common question lately has been what does it take to be in service by year end. Five things must happen. In general, a project must be fully operating and able to get its electricity to market. • serial gearbox failure • 1-mw distribution line • parallel operation

9. The US government offers a tax credit of $6.06 a ton for processing coal to make it at least 20% less polluting. The processing must increase the market value of the coal by at least 50%. It is not clear how to prove value. The fact that the IRS said it would provide answers by next June is making it challenging to do deals in the interim. • legislative fix

10. Another area of frequent questions is the “80-20 test.” Existing power plants in California that convert to run on biomass qualify potentially for 10 years of production tax credits, but only if they are considered “new” plants after the conversion. • 19 • Tulsa • IRS audit

11. The US government is offering a “depreciation bonus” — or the right to write off half the cost of new equipment — this year as a carrot to stimulate new investment. A company must not have committed to the investment before last January 1. The IRS is taking a hard line on audit. Many tax equity investors do not want the bonus. • component • 10% safe harbor

12. The IRS ruled privately this summer that power plants that gasify waste can be depreciated largely over five years. The depreciation is worth 29.8¢ per dollar of capital cost. However, it is a common mistake to think that the entire power plant qualifies for depreciation over five years. • power train

13. Another common mistake at projects that use wood or other biomass is to buy the fuel. Production tax credits can only be claimed on the electricity output from such projects if the fuel is “waste.” • no value • discarded

14. It is not a good idea in solar pv projects to sign a lease or power contract committing the use of the solar panels to the host for more than 80% of their expected life and value. Many deals also have inappropriate risk allocation. • master financing facilities • residential

15. “Serial” partnerships are the new rage. These are partnerships with different tranches or portfolios. Each tranche or portfolio can be treated as a separate entity for tax purposes with a different sharing ratio and different tax year. • IRS business plan

16. The IRS opened the door in a private ruling in the summer last year to putting transmission lines in “master limited partnerships” or REITs. There are tax and economic advantages to such entities. A private ruling in April opened the door for REITs to own solar panels and use them to supply electricity to building tenants. • roll ups

17. The IRS has been challenging owners of ethanol plants on audit about depreciating their plants over five years. It insists the plants must be depreciated over seven years. However, the agency is now reconsidering its position. • chemical plant?

18. Percentage change since 2006 in the price of oil: +96%

19. Percentage change since 2006 in the price of used cooking oil that can be recycled to make biodiesel fuel: +240%

20. “Congress in the tax field functions as the Delphic oracle. We get all the ancient accoutrements of oracular wisdom; smoke, fog, confused mumbling, occasional loud noises and earth tremors, even frightening screams – although nowadays screams seem to come from unhappy supplicants, not from the oracle.” • — Martin Ginsberg

21. Tax Developments Keith Martin kmartin@chadbourne.com