Tax equity ten easiest ways to make money 101 structures woodlawn associates

The three main pillars of competitiveness in the solar industry ten easiest ways to make money are the ability to acquire customers at low cost, install inexpensively, and achieve low cost of capital. To realize a low cost of capital, solar developers must often partner with so-called “tax equity” investors due to the structure of federal solar incentives. This paper summarizes the main financial arrangements used for such ten easiest ways to make money financing: sale-leasebacks, partnership flips, and inverted leases (which are also called lease pass-throughs).

These benefits have value because they reduce the amount of ten easiest ways to make money taxes a business would otherwise pay. For example, suppose a business would owe the government $1 million in income taxes in the absence of any ten easiest ways to make money solar investment, but it now invests $600,000 in solar systems. It takes a tax credit—that is, a direct reduction of its taxes—of $180,000. It also claims bonus depreciation of $255,000 and accelerated macrs depreciation of $51,000 in the first year. [1] if its tax rate is 35%, this reduces its tax burden by another $107,000. The business has reduced its taxes in the first year ten easiest ways to make money by $287,000, or nearly half of its solar investment. This reduction in the taxes the business would otherwise owe ten easiest ways to make money is effectively the federal government’s subsidy of solar.

The american recovery and reinvestment act of 2009 allowed companies ten easiest ways to make money to take a cash grant of 30% of their basis in a solar system from the U.S. Treasury in lieu of the ITC. These grants are often referred to as “section 1603” grants after the section of the law that created them. They expired at the end of 2011. Cost basis and fair market value

One critical consideration in determining the value of the ITC ten easiest ways to make money and depreciation benefits is how much one can claim as ten easiest ways to make money the basis against which one is claiming the benefits—the larger the basis, the larger the tax benefit. A company’s basis is generally the amount of its investment in ten easiest ways to make money the property. When a project is sold by a dealer or developer ten easiest ways to make money to an unrelated third party, the new owner’s basis is clear—it is what it paid for the system.

However, when there is no sale between independent parties—as is the case when a developer contributes or sells ten easiest ways to make money the system to a joint venture that it owns a ten easiest ways to make money part of—the treasury and IRS rely on the concept of fair ten easiest ways to make money market value (“FMV”). They define FMV as “the price at which property would change hands between a ten easiest ways to make money buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts.”

The government will accept FMV calculated in any of three ten easiest ways to make money approaches: cost, market, or income. [2] the cost approach may include the cost of equipment, engineering, permitting, and installation. It may also include overhead related to the above. It may also include a reasonable profit, which treasury defines as 10-20 percent, and a developer fee of 3-20 percent. (the developer fee should not be considered as covering developer ten easiest ways to make money costs that are not eligible to be included in basis, such as marketing or the cost of arranging financing, but rather as compensation for the capital put at risk ten easiest ways to make money before it knew there was going to be a sale.)

Finally, the income approach uses the discounted value of future cash ten easiest ways to make money flows of the project. Treasury is least comfortable with this approach because it relies ten easiest ways to make money on assumptions that are difficult to verify or that require ten easiest ways to make money a lot of judgment. For example: the appropriate discount rate (we have seen developers use everything from 6-10%), the terminal value of the systems, and future rates of inflation and taxes. Although treasury is uncomfortable with the income method, we understand the IRS uses this approach internally.

FMV is a critical issue because (presumably) everyone wants to comply with the law but everyone also ten easiest ways to make money has an incentive to claim the highest FMV possible. This is not to be taken lightly: the departments of treasury and justice have issued subpoenas to ten easiest ways to make money a number of companies in the industry investigating the possible ten easiest ways to make money misrepresentation of FMV for 1603 grants. However, companies that are conservative will receive fewer tax benefits than ten easiest ways to make money those that are more aggressive but still follow the law.

Unfortunately, many businesses that invest in solar systems do not have ten easiest ways to make money significant tax liability. While an individual company that buys its own solar system ten easiest ways to make money might be able to use tax incentives efficiently, no business we know of that specializes in the installation ten easiest ways to make money or financing of solar systems for others has enough tax ten easiest ways to make money liability to be able to use all the federal tax ten easiest ways to make money benefits itself.

As a result, these businesses often seek tax equity investors—investors who can use the tax benefits—as partners. The arrangements used are complex and the number of parties ten easiest ways to make money that have been willing to invest in tax equity has ten easiest ways to make money been limited. As a result, both the administrative costs (in terms of legal and accounting fees) and financing cost (in terms of rate of return required by tax equity ten easiest ways to make money investors) are high. As of this writing, tax equity investors require 7.5-9.5% for unleveraged projects. This is the after-tax return to the tax equity investor, net of its tax benefits. The cash return to the tax investor and cost of ten easiest ways to make money capital seen by the developer are lower.

In partnership flips, the developer (also referred to as “the sponsor” because it sponsors and manages the project) and tax equity investor form a joint venture partnership and ten easiest ways to make money the allocation of profits, cash, and tax benefits “flips” between the parties one or more times during the life ten easiest ways to make money of the partnership. These flips allow the sponsor to invest alongside tax equity ten easiest ways to make money so it retains a residual interest in the systems after ten easiest ways to make money their installations, and they allow the transfer of most (typically 99%) of the tax benefits to the tax equity investor. They also allow the sponsor to regain 100% ownership of the assets at reasonable cost after all the ten easiest ways to make money tax benefits have been used by the tax investor.

The partnerships are organized as limited liability companies so there ten easiest ways to make money are no income taxes at the partnership level; taxes are paid by the investors on their own corporate ten easiest ways to make money tax returns. The vast majority (usually, but not always, 99%) of the profits, losses, and investment tax credits from the partnership flow to the ten easiest ways to make money tax equity for the first several years, after which these attributes “flip” and the sponsor gets the majority of them (usually, but not always, 95%).

The flip is designed to happen as early as the ten easiest ways to make money end of year five or as late as year nine, and is supposed to coincide with a time when tax ten easiest ways to make money equity will have received a certain target rate of return, net of all tax benefits and cash it is distributed. The flip cannot happen before the end of year five ten easiest ways to make money or the government will recapture a portion of the ITC. Profit share does not equal cash share

One important concept to understand when dealing with partnership flips ten easiest ways to make money is that the cash generated by the partnership can be ten easiest ways to make money distributed to the partners in a completely different ratio than ten easiest ways to make money the tax profit or loss. For example, while the tax equity investor may get 99% of the tax profit or loss before the flip—and it is usually a loss, which is what reduces its net corporate tax payments—it usually gets a minority of the cash generated from ten easiest ways to make money lease payments and other sources. Most of the cash goes to the sponsor. Buyout option

The sponsor usually has the right to purchase tax equity’s position after the flip. The buyout price is usually the greater of fair market ten easiest ways to make money value at the time of the buyout or the amount ten easiest ways to make money that would give the tax equity investor its required rate ten easiest ways to make money of return. In any event, because after the flip tax equity only gets a small ten easiest ways to make money minority of cash distributions, the buyout price is quite reasonable (compared with the price in a sale-leaseback). Figure 2 – illustrative partnership flip structure

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