Tax Update
Keith Martin
[email protected]
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The main challenge for most developers of
renewable energy projects is how to get value for
the large tax subsidies that the US government
offers for such projects. The government pays
60% to 63% of the capital cost of a typical solar or
wind project. Most solar projects are being
structured as leases. Most wind farms are being
structured as partnership flip transactions.
3-month window
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The IRS has placed a hold on any further private
rulings in partnership flip deals and is working on
a set of guidelines for such transactions that it
hopes to release late in the year. This schedule
seems optimistic. The hold has had no effect on
the market.
revenue procedure
sharing ratio
residual interest
contingent payments
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The first wind project using a new service
contract structure should have closed by now,
but has hit a snag. The structure is for projects
that a municipal utility would like to own, but
cannot do so and claim the tax subsidies. Under
the structure, it signs a long-term power contract
and prepays for a portion of the electricity.
soft debt
risk allocation
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The number of tax equity investors is subject to
ebb and flow. This has led to renewed interest in
guaranteed-return structures. Equity returns are
in the 7% to 8% range after tax and unleveraged.
There has also been a resurgence of leveraged
deals.
equity squeeze
stay tuned
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Production tax credits for wind and biomass
projects and a 30% investment credit for solar
projects can only be claimed on projects put into
service by December 2007. These deadlines will
not be extended this year by Congress. While the
odds of an extension next year remain high, it is
not a sure thing.
Thomas
turbine prices
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The IRS issued a notice last week about
production tax credits for biomass projects. The
good news is that plants can still claim
production tax credits even if a mix of fuels is
used. Any non-biomass cannot include fossil
fuels. The bad news is production tax credits can
only be claimed on the net amount of electricity
supplied to the grid.
arbitrage transactions
no rulings
gasify?
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The drop in oil prices is breathing new life into
synfuel plants and landfill gas projects. It looked
early in the year like section 29 tax credits of
$1.17 an mmBtu would disappear this year due to
high oil prices. The latest projections suggest
there will be only a partial phase out of the credits
on the order of 32% to 36%.
lobbying effort
$53.20
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The IRS is telling utilities that they must report
the value of any upgrades to their grids as
income if the upgrades are paid for by another
utility or independent transmission company.
Upgrades paid for by independent generators do
not normally have to be reported as income.
EEI
policy at risk?
gas interties
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The IRS is expected to allocate $800 million in
clean renewable energy bonds this fall. It received
more than 700 applications for the money.
Borrowers using the bonds do not have to pay
interest. The lenders will receive tax credits
instead.
5.3%
16 years
no risk adjustment?
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The IRS may not allocate the full $350 million in
investment credits for gasification projects. That
would be good news for companies whose
projects were not far enough along to apply for
credits this year. The US government offers a 20%
investment tax credit for turning coal, biomass
and other materials into a synthesis gas for use in
one of seven industries.
DOE certification
seven years
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The IRS may have opened the door slightly to use
of “master limited partnerships” in biofuels
projects. A private letter ruling in late September
said income that a refinery earns from mixing
ethanol or biodiesel with vehicle fuel is “good
income.”
90% rule
minerals or natural resources
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Many project pro formas fail to take into account
a new deduction for US companies as an
inducement to manufacture at home. Generating
electricity is considered domestic manufacturing.
The deduction is 6% of income from domestic
manufacturing. It will increase to 9% after 2009.
W-2 wage cap
consolidated basis
tolling agreements
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A new tax bill that President Bush signed in May
will require every federal, state and local
government entity in the United States making
payments for “property or services” to withhold
3% of the gross amount of such payments
starting in 2011. An example is a payment by a
municipal utility to buy electricity.
less than $100 million annually
$7 billion
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A tax credit of $5.679 a ton for making “refined
coal” is proving hard to use. Discussions are
underway with Congress and the Treasury.
Refined coal is coal that has been processed to
reduce two of three pollutants by at least 20%.
The problem is the market value must increase by
at least 50%.
moving target
fix in time?
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The IRS is taking the position that all wind farms
must be registered as potential corporate tax
shelters — even deals without any tax play. That’s
because of a rule that requires registration of
transactions where assets are held for 45 days or
less and the owner will receive at least $250,000
in tax credits.
electricity
relief?
confidential?
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The US Patent Office has issued 40 patents on tax
planning ideas and has another 60 applications
pending. A House subcommittee held a hearing in
July on whether it makes sense to allow such
patents. At least one patent infringement lawsuit
is pending against the former chairman of Aetna
for using an estate planning tool that a small firm
in Florida says it patented.
computer software
concerns
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FIN 48 will require public companies to indicate in
their financial statements which of their tax
positions may be challenged on audit. The new
rules take effect in corporate fiscal years starting
after December 15, 2006. Critics charge that it will
provide a roadmap to the IRS about where to
probe on audit.
two-step dance
more opinions?
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Percentage of Americans who say they support air
strikes against Iran “if diplomacy fails”:
51%
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A Harvard student had to complete a paper
addressing four great topics — religion, royalty,
sex and mystery. He was to be graded on brevity.
He got an A+.
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“Oh, my God,” the queen exclaimed. “I’m
pregnant. I wonder whose baby it is.”
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Tax Update
Keith Martin
[email protected]
New York • Washington • Houston • Los Angeles • Beijing • Almaty • Tashkent • Moscow • St. Petersburg • Kiev • Warsaw • London