Legal Quick Hit: Master Limited Partnerships and Renewable Energy The Next Big Thing?

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1 Amish M. Shah Jonathan Goldman August 21, 2013 Legal Quick Hit: Master Limited Partnerships and Renewable Energy The Next Big Thing? Current State of Affairs: How are Renewable Energy Projects Funded? Tax Benefits Section 45 PTCs Section 48 ITCs Accelerated/Bonus Depreciation State tax incentives Tax Equity Flip structure or sale-leaseback structure to monetize credit Structures are commonly used, but have limitations 1

2 What is a Master Limited Partnership (MLP)? Rules provided in section 7704 of the IRC Combines benefits of a partnership and a corporation Partnership interest not readily tradable; corporate income generally subject to double taxation. Like a partnership, no entity-level taxation MLPs traditionally distribute a significant share of operating income. Income taxed only at the individual level (no double taxation). Like a corporation, equity interests (MLP units ) are traded on a public exchange. Use of MLPs is Limited At least 90% of MLP s revenue must be qualifying income : Traditional passive income (e.g., dividends, capital gains, rent, etc.). Income from exploration, development, mining or production, processing, refining, transportation or marketing of any mineral or natural resource. Transportation and storage of alternative fuels. Energy and natural resources dominate MLP market. Over 75% of MLPs in energy and natural resources. Almost 75% of all MLP market capitalization is in midstream and transportation MLPs. 2

3 Recent MLP Renewable Energy Legislation Senator Chris Coons (D-Del) introduced the MLP Parity Act in 2012, and an amended version in Expands the definition of qualifying income which can be earned by an MLP Renewable energy solar, wind, biomass (sections 45 and 48 of the tax code). Thermal power - combined heat and power, renewable thermal energy, and waste heat to power. Renewable fuel production biodiesel, biomass fuel. Other - Energy efficient buildings, carbon capture, renewable chemicals. MLP Parity Act Remaining Issues Passive loss/credit limitations MLPs are subject to the passive loss rules losses in the MLP cannot be used to offset other types of income. Tax credits limited to use against passive income. Targeted at exclusively renewable projects. Generally applies to projects which exclusively use listed resources. May create structuring issues for projects which may utilize both renewable and traditional sources. 3

4 Potential for Becoming Law Standalone legislation Unlikely that the bill alone or larger energy legislation would presently pass in Congress. Tax extenders package Extenders temporary tax provisions which expire and need to be renewed each year or every few years. Other renewable energy tax provisions are part of extenders. Comprehensive Tax Reform Potential for comprehensive tax reform. TaxReformLaw.com track business tax reform. Amish M. Shah Partner Amish Shah, a partner in Sutherland s Tax Practice Group, handles matters involving domestic and international tax planning and tax controversy. Amish also advises clients with respect to incentives for renewable and alternative energy investments, and structuring renewable energy investments to maximize the availability of tax credits and other incentives (including the nonconventional fuels tax credit, alcohol fuels and biodiesel credits, section 45 production tax credit and section 48 investment tax credits). Amish also represents clients seeking U.S. Department of the Treasury grants for renewable energy projects, IRS rulings on energy tax credit matters and advice on renewable energy IRS controversy matters. 4

5 Jonathan Goldman Associate Jonathan Goldman is an associate in Sutherland s Tax Practice Group. Jonathan focuses on international and federal taxation, advising clients on the tax treatment of cross border payments and e-commerce transactions. He also assists clients by tracking U.S. tax policy and writing for TaxReformLaw.com, Sutherland s online resource for understanding the potential outcomes of business tax reform. Prior to joining the firm, Jonathan served as a law clerk with the Senate Finance Committee s tax staff and on the legislative staff of a U.S. Senator. SUTHERLAND S TAX PRACTICE Sutherland s Tax Group has more than 100 attorneys representing many of the world's largest and most prominent corporations - including more than 35 of the Fortune in every industry and in virtually every area of tax law on the federal, international, state and local levels. Our practice constitutes one of the largest and most highly regarded tax practices in the country. Our firm received the Chambers USA Awards for Excellence 2012 in Tax. SUTHERLAND S ENERGY AND ENVIRONMENTAL PRACTICE Sutherland s Energy and Environmental Group has more than 60 lawyers representing every major sector of the energy industry. Our 40-year history of excellence in serving the regulatory, compliance and policy needs of our clients is matched by the commercial and operational experience we bring to increasingly complex transactions. Complemented with our team of well-regarded, high-profile litigators, Sutherland s energy practice is well positioned to provide the full range of legal services to our energy clients. Our clients include crude oil and natural gas refiners and producers, domestic and multinational traders, energy lenders and marketers, hedge funds and financial institutions, independent power producers and electric cooperatives, international oilfield service providers, and renewable energy developers. 5

6 CIRCULAR 230 DISCLOSURE: Any advice provided in this outline concerning a Federal tax issue is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on a taxpayer. 11 6