WIND PRODUCTION TAX CREDITS

Transcription

1 WIND PTC

2 WIND PRODUCTION TAX CREDITS The production tax credit ( PTC ) generally is available to a taxpayer investing in a wind facility when the taxpayer: produces electricity from qualified energy resources (e.g., wind) at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, owns the facility, and sells the electricity to an unrelated person during the taxable year. 2

3 QUALIFIED FACILITY REQUIREMENTS Beginning of Construction Requirement: Construction of a qualified wind facility must begin before January 1, o A taxpayer may establish that construction has begun by either:» (1) starting a physical work of a significant nature (the physical work test), or» (2) paying or incurring 5% or more of the total cost of facility (the 5 percent safe harbor). Continuous Construction Requirement: Construction of a qualified wind facility must be continuous. o From the beginning of construction until the facility is placed in service, qualified facilities are subject to continuity requirements under the physical work test, construction must be continuous, and under the 5 percent safe harbor, efforts must be continuous. 3

4 QUALIFIED FACILITY REQUIREMENTS (CON T) Continuous Construction Under Safe Harbors or Facts & Circumstances Analysis: Continuity Safe Harbor: o A facility will be deemed to satisfy the applicable continuity requirement if placed in service by the later of:» (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or» (2) December 31, For example, if construction begins on a facility on January 15, 2013, and the facility is placed in service by December 31, 2018, the facility will be considered to satisfy the continuity safe harbor. Alternatively, if construction begins on a facility on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the continuity safe harbor. Facts & Circumstances: o If construction of a facility does not satisfy the above continuity safe harbor, whether the facility satisfies the continuous construction or continuous efforts tests is determined by the relevant facts and circumstances. 4

5 WHAT S MARKET: BEGINNING OF CONSTRUCTION Typically, the project sponsor will cover the risks associated with the requirement that the construction has begun before January 1, Representations from the project sponsor will cover all risks associated therewith, including: (1) any transfer of the assets within the group after the construction has begun, and (2) different turbines constituting one single facility for the purpose of determining the starting date of the construction. These representations are made on the closing date when the tax equity investor and the project sponsor enter into the equity capital contribution agreement. Before the funding of the tax equity, there will be a bring-down of all the representations made. 5

6 WHAT S MARKET: CONTINUOUS CONSTRUCTION For the continuity requirement, the facility must either: (i) be placed in service before o o (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began, or (2) December 31, 2018, or (ii) make continuous progress or continuous efforts once construction has begun based on the facts and circumstances. Sponsors typically do not make representations as to continuity, but the receipt of a satisfactory tax opinion from investor s counsel is a standard closing condition. Practically speaking, the project sponsor typically takes out construction loans during the construction period. The tax equity investor enters into an equity contribution agreement with the project sponsor upon the closing of the construction loan. The tax equity investor funds the equity commitment after the construction of the project has been completed. Typically, receipt of placed-in-service certificates and other evidence that the project has been completed is a condition to the investor s funding the tax equity. 6

7 WHAT S MARKET: SALES TO UNRELATED PARTIES The electricity must be sold to an unrelated person during the taxable year. Project sponsor typically does not take this risk. This is an operational risk and can be controlled by due diligence. 7

8 WHAT S MARKET: TAX OWNERSHIP AND PRODUCTION For U.S. federal income tax purposes, the tax equity investor must own the qualified facility and produce the electricity. The risk is whether the investor is treated as a valid partner in a partnership that owns the facility and produces the electricity for U.S. federal income tax purposes. In Rev. Proc , the IRS issued safe harbor guidelines for the flip partnership structure. The IRS later clarified that Rev. Proc only applies to partners or partnerships with wind projects taking the PTC, and does not apply to solar facilities or other projects claiming the investment tax credit. The project sponsor does not take this risk and does not indemnify the investor if the partnership fails the safe harbor guidelines in the Rev. Proc. and IRS successfully challenges the structure. 8

9 WHAT S MARKET: OTHER TAX RISKS Risks for Sponsors: The project sponsor typically indemnifies the investor for pre-closing tax liabilities of the project company. The project sponsor typically pays any transfer taxes incurred in the transaction. The project sponsor typically makes a representation that the assets are not subject to any taxexempt use or financing rules which would extend the depreciation period of the affected asset(s). The project sponsor typically makes a representation that there has not been any other governmental grant or subsidized financing that would reduce the available PTC. The project sponsor typically makes a representation that the facility is located in the United States. Risks for Tax Equity Investors: The project sponsor typically does not take the risks that the available PTC may be phased out when the price for electricity exceeds a certain amount. The project sponsor typically does not take the change of law risks, including any change to the U.S. federal income tax rate. 9

10 WHAT S MARKET: CONDITIONS TO CLOSING AND FUNDING No change or proposed change in tax law typically is a condition to closing; No change or proposed change in tax law typically is a condition to the funding of the tax equity; provided that if there is any proposed change in tax law on the funding date, the investor and the project sponsor agree to cooperate in good faith to make any structural arrangement necessary and appropriate to address the proposed changes; Any proposed change in tax law on the funding date typically is taken into account in modeling the return of the tax equity investor. 10

11 CONTACT Vivian Ouyang Senior Counsel T: E:

12 This presentation is provided for informational purposes only and should not be considered specific legal advice on any subject matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. The content of this presentation contains general information and may not reflect current legal developments, verdicts or settlements. Use of and access to this presentation does not create an attorney-client relationship between you and Bracewell.