8th Annual PricewaterhouseCoopers Like-Kind Exchange Conference

Transcription

1 8th Annual PricewaterhouseCoopers Like-Kind Exchange Conference Session VI-A: Energy Tax Incentives & State Tax Planning Stuart Finkel, PricewaterhouseCoopers William Waltman, PricewaterhouseCoopers PwC PwC

2 Navigating the green frontier: Taking advantage of alternative and renewable energy tax incentives May 1, 2009 This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client and is intended solely for the use and benefit of that Client and not for reliance by any other person. PwC

3 Agenda The green tax incentives landscape Your green initiatives Key opportunities for your business Steps to obtaining green tax incentives Financing considerations Our Approach in Identifying Opportunities Page 2

4 The green tax incentives landscape Significant energy provisions in two recently enacted economic recovery bills allow businesses of all types and sizes to take advantage of nearly $100 billion of tax and other incentives for going green. Passed in October, the Emergency Economic Stabilization Act of 2008 (EESA) included $17 billion in energy tax provisions Enacted in February, the American Recovery and Reinvestment Act (ARRA) added $60 billion in direct spending and $20 billion in tax incentives for renewable energy and energy efficiency over the next 10 years Page 3

5 Your green initiatives Tax fits-in to a larger story Tax incentives aside, increasingly companies are going green to reduce costs, manage risks, and generate new revenue opportunities To get there, companies need to - Have a carbon strategy - Understand where carbon emissions occur in their processes and supply chain - Have processes and controls that manage climate change risk - Develop the ability to accurately account for and report climate change data to stakeholders Tax incentives are an important reason to think about going green today, but they are only part of an overall strategy for responding to climate change Page 4

6 Key opportunities for your business Tax credits/deductions incentivize renewable investments and energy saving improvements: Section 45 Renewable Energy Production Tax Credits Section 48 Energy Property Investment Credit Grants in Lieu of Energy Credits Election to Claim Section 48 Energy Property Investment Credit in Lieu of Section 45 Production Credit Advanced Energy Manufacturing Base Investment Credit Section 179D Energy Efficient Commercial Building Deduction Section 6426 Alternative Fuel Credit Page 5

7 Section 45 Renewable Energy Production Tax Credits Generated from the production of energy from certain renewable sources. The credit is based upon kilowatt hours that are: Produced by the taxpayer From a qualified energy resource At a qualified facility during the 10 years following the placed-in service date (definitions differ among the various types of energy) Sold by the taxpayer to an unrelated person (although sales to a member of an affiliated group is allowable) Considered a general business credit eligible for one year carryback and 20 year carryforward but credit is nonrefundable Credit amount reduced by amount of any subsidized financing received Page 6

8 Section 45 Qualified Energy Production Resources (including placed-in-service requirements) Wind (placed-in-service before 2013) Biomass (open- and closed-loop) (placed in service before 2014) Geothermal (before 2014) Hydropower (before 2014) Marine (waves and tides) (before 2014) Municipal solid waste including landfill gas (before 2014) Small irrigation (150 kilowatts to 5 megawatts) (before 2014) Refined coal (before 2010) Page 7

9 Section 48 Energy Property Investment Tax Credits Section 48 provides an investment tax credit for energy property as a percentage of the property s basis: Solar providing either electricity or light inside a structure (30% credit through 2016) Geothermal (either 10% without placed-in-service date, or 30% credit through 2013; see below) Fuel cell (30% credit through 2016, capped at $1,500 per half-kilowatt of capacity ) Microturbine (defined as less than 2,000 kilowatts) (10% credit through 2016, capped at $200 per kilowatt of capacity) Small wind (defined as 100 kilowatts or less) (30% credit through 2016, with no credit cap for tax years after 2008) Combined heat and power systems (10% credit through 2016) After December 31, 2008, the property s basis is not required to be reduced by the amount that the Section 48 credit is subsidized by energy financing under a federal, state, or local program Considered a general business credit eligible for one year carryback and 20 year carryforward but credit is nonrefundable Page 8

10 Grants in Lieu of Energy Credits ARRA creates a new grant program option in lieu of the Section 45 energy production credit or the Section 48 energy investment credit. The grant amount is 30 percent of the depreciable or amortizable basis of the energy property in the case of wind, biomass, Section 45 geothermal, solar, landfill, gas, trash, hydro, marine, qualified fuel cell, or small wind property The grant amount is 10 percent for microturbine, combined heat and power, small irrigation, section 48 geothermal, and geothermal heat pump The basis of the underlying property must be reduced by 50 percent of the amount of the grant The grant program will be administered by the Treasury Secretary Consideration: Construction risks associated with "placed-in-service" requirement Page 9

11 Election to Claim Section 48 Energy Property Investment Credit in Lieu of Section 45 Renewable Energy Production Credit ARRA provides an election allowing qualified Section 45 facilities (other than solar, refined coal, or Indian coal) to elect the 30 percent Section 48 investment credit in lieu of the Section 45 production credit. The election applies to the eligible basis of depreciable (or amortizable) qualified Section 45 property placed in service between January 1, 2009 and December 31, 2013 (December 31, 2012 for wind facilities) Qualifying property must be tangible personal property or other tangible property not including a building or its structural components if such property is integral to the facility Consideration: day-one tax benefits vs. year-over-year section 45 credits Page 10

12 Advanced Energy Manufacturing Base Investment Credit ARRA provides a new 30 percent investment credit for qualified property used in a qualified advanced energy manufacturing project. Applies to construction, reconstruction, or erection of tangible personal property and other tangible property (not including a building or its structural components) completed by the taxpayer after October 31, 2008 and used to manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies The basis of the qualified property must be reduced by the amount of the credit received Treasury has been allocated over $2.3 billion to fund the credit-eligible projects that meet specific criteria as certified by the Treasury Considered a general business credit eligible for one year carryback and 20 year carryforward Page 11

13 Section 179D Energy Efficient Commercial Building Deduction Under Section 179D, the costs of energy efficient commercial building property placed in service before 2014 are allowed as a deduction for otherwise capital costs: The basis of any energy efficient commercial building property must be reduced by the amount of the deduction The Section 179D deduction is treated as depreciation The deduction is limited to the square footage of the energy efficient commercial building property multiplied by $1.80 Page 12

14 Section 6426 Alternative Fuel Credit Section 6426 provides various excise and income tax credits for certain non-petroleum fuels sold or used by the taxpayer. EESA extends these credits through December 31, 2009 or 2010, depending on fuel type Although there is also no requirement that the taxpayer be subject to federal excise tax on the purchase or use of the fuel, the credit must be used against certain fuel excise tax first, and then may be applied against income tax There is no limitation on the amount of the credit (i.e., no cap or phaseout). Thus, the entire amount of the credit is claimable Credits: Alcohol mixtures- up to 60 cents per gallon Biodiesel mixtures- up to $1 per gallon Alt. fuel and alt. fuel mixtures- 50 cents per gallon or gasoline gallon equivalent Page 13

15 Now what? Steps to obtaining green tax incentives Many of the new green tax incentives require registration with the IRS or application to the Department of the Treasury. As a result, these programs may require additional tax compliance measures or new administrative efforts. This can include: Determining initial eligibility for an incentive program based on current or planned operations Filing proper IRS registration documents and subsequent weekly, quarterly or annual forms to claim alternative fuel payments Assembling the Treasury application required for the grant-in-lieu-of credit program Obtaining project certification from Treasury required for the Advanced Energy Manufacturing Base Investment Credit Page 14

16 Agenda Sales and Use Tax Application of Trade in Credits Texas Illinois Income/Franchise Taxation Income/Franchise Tax Savings Related to Off-Lease Vehicle Remarketing Page 15

17 Agenda Texas Motor Vehicle Sales Tax Fair Market Value Deduction - Pursuant to 34 TAC 3.73 A lessor essentially treated as a dealer for purposes of creating trade-in credits. Page 16

18 Agenda Texas - Lessor may deduct the fair market value of a disposed motor vehicle that is titled in its own name in Texas ( retired vehicle ) from the total consideration that is subject to the Texas motor vehicles sales tax for a replacement motor vehicle. - This fair market value deduction may be utilized irrespective of whether or not the retired motor vehicle is sold to the dealer that sells the replacement motor vehicle. Page 17

19 Texas Typical Transaction Flow Dealer 1 Dealer 2 Tax computation: Old Vehicle Cash Lessor Cash New Vehicle _ x New vehicle selling price Old vehicle(s) selling price Tax Base Tax Rate Tax Page 18

20 Texas - A company can replace multiple retired vehicles with one of greater value, using the combined fair market value of the retired vehicles for the deduction. - However, the fair market value of a single retired vehicle cannot be split among several newer lower priced replacement vehicles. Page 19

21 Texas Specific Requirements: - Traded-in vehicles must be titled in Texas - Advance trade-ins are good for 18 months Page 20

22 Illinois Has a Similar Opportunity (However there are important differences) Page 21

23 Provisions of Ill. Admin Code Treat purchases by lessors as taxable sales. Eliminates tax on rental streams. Treats dispositions other than vehicles as exempt occasional sales in certain instances. Provides credits to lessor when tax collected on dispositions of vehicles. Page 22

24 Provisions of 86 Ill. Admin Code Allows reduction of Gross Receipts by value of traded in property. Must be of like kind and character. Page 23

25 Provisions of 86 Ill. Adm. Code Allows Assignment of lessee s trade-in. Allows advance trade-in up to 9 months prior to purchase. Allows multiple trade-ins against a single purchase. Allows trade-in credit to be split on the purchase or multiple vehicles. Requires holder of trade-in credits to be the purchaser of new vehicle. Page 24

26 Illinois - Initiation of 3 party lease. Credit Limted to Buyer s trade-in (requires assignment) 1. Buyer trades-in vehicle to dealer. 2. Buyer leases new vehicle from dealer. 3. Upon execution of the lease, dealer subsequently sells vehicle and assigns the lease to Lessor. 4. The subsequent sale of the vehicle results in a tax liability that is collected by the dealer and remitted to the State. DOR Tax Assignment of Lease Lease of New Vehicle Lessor Dealer Buyer Sale of Vehicle Trade-in Vehicle Page 25

27 Illinois Transaction Flow Facts Lessor disposes of used vehicles coming off of lease through auction houses which sell to automobile dealers. Lessor has a LKE structure and related systems in place. Lessor assigns the title to the used vehicles directly to the dealers that purchase the vehicles. Used vehicle funds flow from the purchasing dealer to the auction house and finally to the QI to be held in escrow. The QI uses used vehicle funds received and held in escrow toward the purchase of the new vehicles to complete the LKE. Typical LKE off-lease Vehicle Disposal (No Trade-in Credit generated) Lessor Vehicle Funds Auction House QI (LKE) Vehicle Title Funds Vehicle IL Dealer IL Page 26

28 Illinois - Off-Lease Vehicle Disposal (In-state) which generates Illinois Sales Tax Trade-in Credits to offset tax liability on new leases. Vehicle Auction House Vehicle Title Funds Lessor IL Dealer Vehicle Title Vehicle Title IL Funds QI/ LKE Funds Joint Collection Account Joint Disbursement Account Page 27

29 Illinois Same party issue raised by insertion of QI. 86 Ill. Adm. Code disclosed principles. Letter Ruling. ST GIL Page 28

30 Illinois Potential for utilization of out of state vehicles for Illinois trade-in credit Letter ruling ST GIL Page 29

31 Income/Franchise Tax Savings Opportunity Related to Off- Lease Vehicle Remarketing Page 30

32 Income/Franchise Tax Savings Opportunities Idea Description Many auto dealers, bank and auto leasing companies source sales for apportionment purposes from remarketing off-lease vehicles using the garage location (i.e., where the leasing customer resides). This is contrary to state tax sourcing rules that generally assign receipts based on either a place of delivery rule or an ultimate destination rule. The place of delivery rule (also known as a dock sale) assigns receipts based on where the seller transfers possession of the property to the purchaser. In many cases this will be the auction site. Page 31

33 Income/Franchise Tax Savings Opportunities Idea Description (cont.) The ultimate destination rule assigns receipts based on where the customer is located (i.e., the final destination of the vehicles). We may be able to achieve significant state income/franchise tax savings by identifying the proper sourcing place of delivery (i.e., auction site) or final destination (i.e., customer location). Page 32

34 Income/Franchise Tax Savings Opportunities Current and Prospective Benefits -Tax savings from recalculating state apportionment based on each state s sourcing rules resulting in a potential reduction to state tax liabilities through rate arbitrage. -Also, potential sales factor dilution in non-auction or non-destination states based on how sales of property should be included in the sales factor (i.e., net vs. gross rules). Prior Years Potential refunds for open years. Page 33

35 Income/Franchise Tax Savings Opportunities Issues to be Addressed - The opportunity is very fact sensitive and savings are only available for non-deferred (non-lke) revenues. - Need to model base case and alternative sourcing scenarios to quantify net savings (i.e., gross tax savings net of any states which have an increase in tax liability based on the proposed sourcing methodology). Page 34

36 Income/Franchise Tax Savings Opportunities Issues to be Addressed - States may require specific documentation (e.g., bills of lading, delivery instructions or sales invoices indicating out-of-state destination) for final destination sourcing. - Depending on business factors (e.g., transportation costs, location of buyers, etc.) it may be beneficial to direct sales through auction sites in low rate jurisdictions (e.g., Texas). Page 35

37 Q&A 2007 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). PwC

38 PwC NY-GR A 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.