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Tax Update

Tax Update. Keith Martin kmartin@chadbourne.com.

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Tax Update

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  1. Tax Update Keith Martin kmartin@chadbourne.com

  2. Will the Treasury cash grants be extended?   The tax committee staffs on Capitol Hill give an extension only a 40% to 50% chance this year.  Nothing will happen before late November or December.  The House is still proposing to turn the cash grants into a tax refund program.  Potential complications are the cost, the fact that the Senate is less keen on the program, and foreign content. • Bush tax cuts Cantwell

  3. In meantime, everyone is focusing on what it takes to start construction this year.  All remaining projects must be under construction by December to qualify for grants.  There are two ways to show that construction started. The Treasury is taking a liberal view. • physical work 5% test

  4. It is physical work to start construction of permanent roads, but not a road from the project site to the main highway, not roads that will be used solely by people and not temporary roads that will be used only for construction.  It is physical work for a module or other manufacturer to start physical assembly at the factory. • “binding” contract

  5. The problem with the physical work test is that construction must be "continuous" once it is considered to have started.  However, the Treasury has said continuous means a normal pattern for the industry.  It is not building one concrete pedestal and then disappearing from the site until 2012. • presumption

  6. There is no continuous construction requirement under the 5% test.  However, it is not enough merely to make payments this year.  Costs must be "incurred."  They are not incurred until equipment is delivered, with one exception.  Payments count in 2010 if delivery is expected within 3 1/2 months of payment.

  7. Many companies are planning to take delivery of equipment at the factory in order to incur costs in 2010 and then to ask the manufacturer to store the equipment at the factory. 

  8. You can count the costs you incur directly.  You can also count costs that an equipment supplier or other contractor incurs.  Taking delivery of components out of inventory does not count.  The test is more than 5% of the eligible project cost.

  9. The Treasury said that a parent company that orders lots of custom-made equipment under a frame agreement and takes delivery of a share of it does not have to know where the equipment will be used this year.  It can contribute the equipment later in batches to different project companies and each of those projects will qualify for a grant. • wholly owned

  10. It is not clear when costs for design or engineering work are incurred if they are not under a separate contract.  Soft costs only count if they are related to construction contracts, permits and negotiation of equipment supply agreements and construction financing. 

  11. NREL has been pushing back on the basis claimed in transactions where the grant is claimed on fair market value -- rather than cost -- and the company has no direct sales outside a tax equity deal to prove the value. One solar developer filed a lawsuit. • solar residential

  12. The Treasury inspector general sent draft reports this week to nine companies that received large grants with recommendations that they repay part of the money.  The inspector general found differences in how companies calculate eligible basis.

  13. Congress extended a 50% depreciation bonus last week to the end of this year.  The extension was retroactive to last January 1.  Half the basis in equipment placed in service this year can be deducted immediately.  This may affect tax equity transactions. • 2.6¢

  14. Developers could be forced by a proposal moving through Congress to pay taxes at ordinary rates — rather than capital gains rates — on gain from sales of any “carried interests” they retain in projects. They could also be limited to using depreciation as shelter only for income from the project. • tiered partnerships

  15. Technical corrections that Congress is likely to enact later this year would inadvertently rule out sale-leasebacks for wind and biomass projects.  The provision would apply retroactively to when the economic stimulus bill passed last year.

  16. A proposal by FASB and the IASB in August could dampen interest in sale-leaseback structures.  Developers will have to include the obligation to pay rent under the lease as a debt on balance sheet.  • retroactive • drivers

  17. Two Chinese investments in US companies have been effectively blocked in the last 10 months by CFIUS, including one in a solar company.   CFIUS reviews transactions with potential national security implications.   Of 469 transactions submitted for review since 2006, 14% had to be withdrawn.  • unwind risk

  18. Several wind farms are installing large batteries.  It is unclear how much of the battery qualifies for a Treasury cash grant or investment tax credit in cases where it is on the high side of the step-up transformer or is used to provide regulation or other ancillary services to the grid. • 75% test? • primary use?

  19. DOE has issued four loan guarantees and another 16 commitments. It has received more than 400 applications, but only a handful under the “FIPP” program for projects that use commercially-proven technologies. • September 2011 • 37.5 bps

  20. Senators Bingaman (D.-New Mexico) and Brownback (R.-Kansas) introduced a standalone national renewable energy standard bill this week to much fanfare. Senator Reid put it on the calendar for possible consideration during a lame-duck session after the November elections, but the odds are heavily against any action this year . • BP?

  21. Carbon controls are dead, particularly if the Republicans take control of one or both houses of Congress. The only issue is whether Congress will act later this year to prevent the US Environmental Protection Agency from acting on its own to limit carbon emissions.

  22. Use partnerships to own projects in California.  A partnership can use MACRS depreciation for state tax purposes.  If a project is owned by a corporation or "disregarded" subsidiary of a corporation, then the assets must be depreciated over the economic life. • logic?

  23. Accounting firms are once again recommending to developers of California projects that they try to avoid sales taxes on major equipment by buying the equipment out of state and contributing it to the project company.  The approach works only if there is a business purpose. • SBE use taxes

  24. A transaction in which SDG&E acted as the tax equity investor in a partnership flip transaction is now before the CPUC for approval.  SDG&E basically lent its tax base to the project in exchange for lower prices for what are essentially renewable energy credits.

  25. Solar residential companies are viewing a recent IRS private letter ruling as an effort by some utilities to keep them out of their service territories. The IRS ruled that utility rebates paid to homeowners are taxed if the rebate is essentially a forward purchase of renewable energy credits by the utility.

  26. The IRS opened the door to use of "series LLCs" in proposed regulations on September 14.  Delaware, seven other states and Puerto Rico allow LLCs to form multiple series or cells that hold different investments and have different ownership or sharing ratios.  Debts of one series cannot be collected from assets belonging to another. • tracking stock

  27. Three large wind farms have now been successfully financed using prepaid service contracts.  The utility prepays for a large share of the electricity to be delivered over time.  The developer reports the income as the prepaid electricity is delivered.  The prepayment covers 50% to 70% of the project cost.

  28. Debt and tax equity yields touched bottom in early June, edged up in June and edged back down in September. Debt rates are 225 to 300 bps above LIBOR with upfront fees of 275 bps. Tenors have moved back to 10 to 15 years, with at least one deal at 17 years. Construction debt covers 50% to 55% of project cost, with another 30% covered through an “equity bridge loan.” Roughly 30 banks are active currently in the market, with about half expected to commit more than $100 million this year. • capital markets

  29. The tax equity market will probably do the same number of deals this year as in 2007, but on a lower dollar amount.  There are 16 active tax equity investors.  However, three to five have suggested they will drop out if the Treasury cash grant is not extended.  Yields bottomed at 8% in late May for Treasury cash grant deals.  They are 100 bps higher for investment credit transactions and 125 bps higher for PTC deals. Project-level debt adds at least 300 bps. • bifurcated yields

  30. Total number of pages in the financial sector reform bill enacted by Congress in July: 861

  31. Number of pages in the bills that created Social Security and the Federal Reserve Board, respectively: 29, 8

  32. Number of people in India who currently have access to a mobile phone: 617,500,000

  33. Number who have access to a toilet: 366,000,000

  34. Tax Update Keith Martin kmartin@chadbourne.com

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