AD Tax Credits, Section 1603 Grant

Transcription

1 Promoting the Anaerobic Digestion and Biogas Industries AD Tax Credits, Section 1603 Grant Updates and Audit Activity Our Partners: Organized by the American Biogas Council December 11, :45 p.m. ET

2 Promoting the Anaerobic Digestion and Biogas Industries Quick Notes Two Audio Options: Streaming Audio and Dial In. 1. Streaming Audio/Computer Speakers (Default) 2. Dial In: Use the Audio Panel (right side of screen) to see dial in instructions. Call in separately from your telephone. Ask questions using the Questions Panel on the right side of your screen. The recording of the webinar and the slides will be available after the event. Registrants will be notified by .

3 Promoting the use of Biogas and Anaerobic Digestion Promoting the Anaerobic Digestion and Biogas Industries O 151 Members from the U.S., Germany, Italy, Canada,UK O All Industry Sectors Represented Key Industry Goals: O Promote biogas markets, technologies and infrastructure O Achieve policy parity O Promote as a best practice for environmental stewardship and greenhouse gas reduction

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5 Promoting the Anaerobic Digestion and Biogas Industries Presenter Amish Shah Partner, Sutherland Asbill & Brennan, LLP Handles matters involving domestic & international tax planning & tax controversy 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 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

6 Anaerobic Digestion Tax Credits and Section 1603 Grants: Updates and Audit Activity Amish M. Shah h Presented to: American Biogas Council December 11,

7 Tax Credits and Grants 7

8 Federal Renewable Energy Incentives Incentives available for renewable energy projects Open-Loop Biomass (Includes AD) Wind Solar Closed-Loop Biomass Geothermal Municipal Solid Waste Combined Heat & Power Small Wind Qualified Fuel Cell Qualified Microturbine Qualified Hydropower Marine & Hydrokinetic 8

9 Federal Renewable Energy Incentives Three primary incentives Production Tax Credit Tax credit of 2.2 or 1.1 per kilowatt hour generated during first 10 years after project is completed. Treasury Grant Cash payment of 30% (10% in limited cases not tad) of fthe cost of fthe project in year project completed. Investment Tax Credit Tax credit of 30% (10% in limited cases not AD) of the cost of the project in year(s) of construction. 9

10 Federal Renewable Energy Incentives Tax Credits Generally, no benefit from tax credit if a developer has no tax liability (i.e., no U.S. taxable income) Structures available to monetize credits. Additional Grant Requirement Project must have either been complete by the end of 2011 or construction must begin by end of Construction treated as beginning if physical work of a significant nature has been undertaken. 10 Preliminary i applications due September 30, 2012, Final applications due 90 days after placed in service

11 Federal Renewable Energy Incentives Production Tax Credit Amount (per KWH) Investment Tax Credit Amount (% of cost) Treasury Grant Amount (% of cost) Date By Which Construction Must Be Complete Wind % 30% 12/31/12 Solar N/A 30% 30% 12/31/16 Open-Loop Biomass % 30% 12/31/13 Closed-Loop Biomass % 30% 12/31/13 Geothermal % 30% 12/31/13* Municipal i Solid Waste % 30% 12/31/13 Combined Heat & Power N/A 10% 10% 12/31/16 Small Wind N/A 30% 30% 12/31/16 Qualified Fuel Cell N/A 30% 30% 12/31/16 Qualified Microturbine N/A 10% 10% 12/31/16 Qualified Hydropower % 30% 12/31/13 Marine & Hydrokinetic % 30% 12/31/13 11 * 10% ITC available for geothermal property completed after 12/31/13 and before 12/31/16.

12 Complex Calculus of Electing PTC, ITC, or Grant PTC: Higher capacity Available liquidity Type of facility - Wind ITC/Grant: Higher construction cost Higher assumed discount rate Need for cash Lower risk tolerance Tax investor availability Availability of subsidized energy financing 12

13 Depreciation Benefits Bonus Depreciation 100% or 50% of project cost sometimes available Accelerated Depreciation Generally 5-7 year depreciation recovery period Note- Cost basis of property p reduced by 50% of the amount of ITC claimed or Treasury grant awarded (no reduction for PTC claim). 13

14 State Incentives Statutory Tax Incentives Available to taxpayers meeting certain predetermined criteria May apply to a broad range of businesses, or be specific to renewable energy Requires state tax analysis. Negotiated Tax Incentives Negotiated with local tax officials for favorable property tax benefits or bond financing Must be commenced prior to announcement of project/investment for greatest benefit 14

15 Case Study Assumed Renewable Energy Project Cost- $1,000,000 ITC $1,000,000 * 30% = $300,000 ITC Depreciation Cost basis- $850,000 ($1,000,000 less 50% of grant amount) Depreciation $850,000 * 35% (tax rate) = $297,500 15

16 Case Study Net Cost Initial Cost $1,000,000 ITC ($300,000) Depreciation ($297,500) Net Cost $402,500 Additional cost recovery through: State tax and other incentives, including RECs. Reduced energy costs 16

17 Monetizing Tax Credit Flip Structure Parties Project Developer Tax Equity Investor Goals Funding of Project by TEI 5+ or 10+ year investment by TEI Equity return plus expected IRR to TEI Developer monetizes tax credits and other tax benefits Developer operates facility Developer ultimately wholly owns facility 17

18 Monetizing Tax Credit Flip Structure Example: Period 1: 10 Years Developer/Operator Investor 1% owner 99% owner Operating LLC Facility 18

19 Monetizing Tax Credit Flip Structure Period 2: Beginning in Year 11 Developer/Operator Investor 95% owner 5% owner Operating LLC Facility 19

20 Monetizing Tax Credit Sale-Leaseback Structure Developer sells the solar equipment to Investor; Investor in turn leases the equipment back to the Developer. Investor is entitled to: Federal Tax Credits Certain State Incentives Depreciation Deductions Fixed Lease Payments from Developer Developer: Enters into power purchase agreement with Host (or may sell to grid). PPA should provide payments in excess of lease payments. Option to purchase panels at FMV at end of lease or extend lease. Host: Fixed price for electricity or Avoided cost (i.e., 90% of what utility would have charged) 20

21 Monetizing Tax Credit Sale-Leaseback Structure Developer/ Operator/ Lessee Power sale income Power Purchaser Leaseback Sale Lease Payments Investor Credits/ Grant Depreciation Other incentives Project 21

22 Updates and Audit Activity it 22

23 1603 Grant and Tax Credit Update Section 1603 Renewable Energy Treasury Grants Numbers to-date: Roughly 7,420 grants awarded More than $14 billion in total grants Average award = $1.9 billion Median award = $65,000 Largest award = $543 million Smallest award = $217 23

24 1603 Grant and Tax Credit Update Recent developments could impact Section 1603 Grants Sequestration Recent IRS ruling Audits by the IRS and the Department of Treasury s Office of Inspector General (OIG) SolarCity s SEC filing recently disclosed that it and other recipients e have received ed notices and subpoenas from the IRS and OIG. OIG has released the results of nine audits. 24

25 Sequestration Issue Recipients of grants may face a 7.6% haircut of their grant amounts through sequestration. Background Budget Control Act of 2011 requires Congress to make automatic federal budget cuts, known as sequestration, beginning January 2, 2013 if Congress does not enact by the end of 2012 to reduce the deficit by $1.2 trillion. Recent report from the Office of Management and Budget stated that Section 1603 grant awards are subject to sequestration. Sequestration would cut payments made beginning January 2, 2013 by 7.6%. 25

26 Sequestration Consider Delaying Placed-in Service Applicants may consider whether a delay in the placed-in service date or the delay or acceleration of the filing of a final application may be possible and appropriate. Delaying would allow Congress additional time for Congress to resolve budgetary issues giving rise to the sequestration haircut. Risks operational issues and time value of money costs. 26

27 Recent IRS Ruling IRS April 2012 ruling: supports position that costs of acquiring a project are allocated to the PPA are includible for purposes of determining the amount of Treasury grant available. Ruling revoked in December * * * Other unresolved Treasury grant issues. 27

28 Audits Summary of Key Issues The proper cost basis of the renewable energy property upon which the grant amount was based. For projects placed in service after December 31, 2011, whether such projects satisfied the beginning of construction requirement for the Section 1603 grant (including for projects that received preliminary beginning of construction confirmations from Treasury). Whether any recapture is required for post-grant award activity or inactivity. That project meets all other requirements, including placed in service dates, continued eligibility as specified energy project, continued ownership, etc. 28

29 IRS Audits May be audited by IRS and/or Treasury IRS Jurisdiction Section 1603 program administered by Treasury Department; but A Section 1603 grant is excludable from income for federal income tax purposes Thus the IRS has concluded that it has jurisdiction to determine whether a Section 1603 grant was properly excludable from income i.e., the IRS has the right to review whether the grant was properly claimed. 29

30 Audits Summary of Procedures Audits may include: Site visits by IRS and/or OIG Interviews with company staff and independent public accountants; Written requests for information through IDRs or subpoenas Review of original application and supporting documents Review entire list of expenses for proper inclusion Review of annual reports filed since application 30

31 Tax Controversy Overview Selection for Examination Opening Conference Information Gathering Notice of Proposed Adjustments (Form 5701) RAR/90-Day Letter Protest Appeal Litigate 31

32 Handling an Examination How Does IRS gather information? Information & Document Request (IDR) (Form 4564). Form IDRs for Section 1603 projects will likely request information similar to that provided to Treasury in connection with the Section 1603 grant application. 32

33 Handling an Examination How Does IRS gather information? (Cont d) Summons Power. Section 7602 Summons may be issued to verify correctness of return. Can request testimonial or documentary evidence. Third-party Contacts. IRS can request information from third parties without summons. IRS must notify taxpayer that third parties will be contacted. IRS can issue summons to third parties ( 7609). Interviews. IRS may interview key individuals. 33

34 Handling an Examination Opening Conferences. Company contact Agreement on duration Agreement in scope of audit Accommodations for revenue agents Other IRS personnel involved Opportunity to meet with IRS counsel Timing of IDR responses 34

35 Handling an Examination IDR Responses Voluntary request for information. Must be in writing Agree to numbering system Should specify information requested. Treat as starting point for negotiations. May be too broad (additional work and exploration into other issues). Review to determine if privileged info requested. Alternative sources of information. Don t guess regarding what agent wants. Maintain IDR log. Identify any potential delay issues Monitor IDRs for quality Limit IRS access to personnel 35

36 Handling an Examination Notice of Proposed Adjustment (Form 5701) 36

37 Handling an Examination Revenue Agents Report/90-Day Letter (Statutory t t Notice of Deficiency) i IRS statement of facts, and legal position May file protest to go to IRS Appeals Otherwise, take to Tax Court, Court of Federal Claims or US U.S. District i Court 37

38 Appeals Appeals Settlement Authority Appeals Procedures RAR (30 day letter) Protest Rebuttal Pre-conference Conference Post-conference submissions Closing agreement/870-ad Joint Committee review 38

39 Post-Appeals Mediation Governed by Rev. Proc Available where agreement cannot be reached in Appeals. Appeals and taxpayer must both agree to participate. Mediators IRS mediator always involved Taxpayer mediator may be involved 39

40 Litigation Choice of forum Tax Court (pre-payment, national jurisdiction) Appeal to circuit of taxpayer s principal p place of business Court of Federal Claims (post-payment, national jurisdiction) Appeal to Federal Circuit District Court (post-payment, venue of taxpayer s principal place of business) 40 Appeal to circuit it of taxpayer s principal place of business

41 OIG Audits Treasury s Office of Inspector General (OIG) performs audits independent of IRS Purpose: to investigate the administration and implementation of the Section 1603 grant program, including possible misrepresentations concerning the fair market value of the energy property submitted for the grant. If OIG determines a misrepresentation was made, DOJ could bring a civil suit to recover amounts it believes were improperly paid. Damages and penalties could also be asserted. 41

42 OIG Audits Results of nine OIG audits released in 2011 and 2012 Four audits concluded d that t certain amounts were improperly included in the cost basis. EcoGrove Audit: OIG concluded that certain related party payments should not be included in cost basis. Three audits concluded that certain tangible expenses were improperly included. Five audits found that the cost basis was properly calculated. E.ON Audits (2): OIG initially concluded that expenses for spare parts should not be included, but reversed after response from company and receiving guidance from IRS. 42

43 OIG Audit Spare Parts E.ON received over $500 million in 1603 grants. Two properties audited. Inandale Wind Farm Audit # OIG application submitted December 2009 Pyron Wind Farm Audit # OIG application submitted September 2009 OIG initially iti found $3.5 million for spare parts to be improperly included expenses in the two projects. After receiving responses from E.ON and guidance from IRS Chief Counsel, OIG reversed its conclusion and found that the cost for spare parts were eligible. 43

44 OIG Audit Spare Parts Spare Parts Issue Spare parts purchased after the in service date of the wind farm, but before the 1603 application was submitted. At the time of application, the spare parts were in a state of readiness, meaning on site and available for use. Disagreement on the 1603 guidance and tax law Should the spare parts be included in the 1603 cost basis if purchased after the in service date? Should the spare parts be considered functionally interdependent with the property, or considered as a separate property part of the 1603 basis. 44

45 OIG Audit Spare Parts OIG Initial Position: Spare Parts Not Includible Spare parts purchased after the in service date and were not functionally interdependent with the wind turbines. E.ON challenged findings and IRS agreed IRS Chief Counsel guidance to Treasury: The test is not whether the parts are necessary to put the property in service, but whether they relate to the functioning of that equipment. Certain types of spare parts are part of the functioning of machinery. The E.ON parts fit within this. The date of the test for determining what is the date of the application, not the date the property is put in service. 45

46 Improper Tangible Expenses Audit downside with no upside? In Nevada Solar One, OIG found an actual expense was less than the initial accrual, and recommended recoupment. Company concurred, but also found other accruals where the actual cost was higher than the initial accrual. OIG refused to adjust its report for expenses it hadn t examined, and Treasury concurred with OIG s finding. Will companies have the potential to net cost accrual errors if the Treasury seeks recoupment? 46

47 OIG Audit Takeaways OIG is not the final word on the interpretation of tax rules and Treasury guidance. The effective response to the draft audit report can help guide Treasury and IRS Chief Counsel to a conclusion on the law beneficial to the 1603 award recipient. 47

48 New Audits on Fair Market Value OIG audit of SolarCity possible misrepresentations concerning the fair market value of the solar power systems Not just an issue of includable expenses Fair market value can be used in lieu of actual cost, and dis common where leasing involved OIG likely looking at valuation of property to see if appraisals were accurate. 48

49 Audits Final Thoughts Disagreements may be resolved through administrative appeals or litigations. If contacted by IRS and/or OIG, recipients should quickly become familiar with procedural aspects of such an audit, how to manage an audit and the timeframes and procedures for challenging any determination that reduces or reverses a grant award. Applicants receiving larger grants should consider preparing for an audit now, while the information that may be necessary to support a grant award is readily accessible and the people involved in the project are still available. 49

50 Questions? Contact Information Amish M. Shah Partner Sutherland Asbill & Brennan LLP s a a 50

51 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 t may be imposed on a taxpayer. 51

52 Promoting the Anaerobic Digestion and Biogas Industries Q&A Ask questions using the Questions Panel on the right side of your screen. All questions and comments will be recorded and incorporated in the webinar summary report. Also, please a few moments to answer the survey questions. This Webinar Wbi will be available by Friday, Fid December 14

53 Promoting the Anaerobic Digestion and Biogas Industries More Information Don t forget to fill out our survey! Sign up to receive ABC news on our website, il Consider Joining ABC Receive regulatory and policy intelligence Connect with other biogas and anaerobic digestion leaders Support the industry s growth and outreach

54 Promoting the Anaerobic Digestion and Biogas Industries Speaker Contact Information Amish Shah, Sutherland Asbill & Brennan, LLP (202)

55 Promoting the Anaerobic Digestion and Biogas Industries Thank You Wayne Davis, ABC Chairman (781) Patrick Serfass, ABC Executive Director (202)