23 rd Annual Health Sciences Tax Conference

Transcription

1 23 rd Annual Health Sciences Tax Conference December 11, 2013

2 Disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Page 2

3 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit ey.com. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 3

4 Presenters Kara Adams Ernst & Young LLP Suite Von Karman Avenue Irvine, CA Dominick Brook Ernst & Young LLP Suite South High Street Columbus, OH Gary Horowitz Ernst & Young LLP 99 Wood Avenue South Iselin, NJ Paul Naumoff Ernst & Young LLP Suite South High Street Columbus, OH Page 4

5 Agenda Traditional incentives Federal tax incentives Employer-provided child care credit New markets tax credit Federal employment-related tax credits Excise tax refunds Sustainability overview Section 179D State and utility incentives Section 48 Monetization of tax credits PACE financing Legislative update Questions? Page 5

6 Traditional incentives Page 6

7 Qualifying events for traditional incentives Create new business operations Construction/purchase/lease of new facilities Purchase of new machinery/equipment Infrastructure improvements Hiring and training of new employees Expand, realign or relocate existing facilities Construction/purchase/lease of new/expanded facilities Purchase of new machinery/equipment Infrastructure improvements Hiring/retention of new/existing employees Training of new/existing employees Maintain existing facilities Retention of existing workforce Hiring due to employee turnover Training of new and existing employees Page 7

8 Traditional business incentives Governments offer tax and nontax benefits: To companies that are contemplating relocation, expansion and/or major capital investments within their jurisdictions To companies that are hiring and/or training significant numbers of staff Tax incentives: Include reductions in income/franchise tax, sales and use tax, real and personal property tax and employment taxes Nontax benefits: Include job creation/training grants, infrastructure grants, utility discounts and low-cost financing Page 8

9 Identify opportunities Cash grants Broadband extensions Free (or reduced) land Property tax abatements Low interest or forgivable loans Relocation assistance Utility rate reductions Waiver of building permits and utility tap-on fees Training grants Water and sewer extensions Road improvements Sales tax exemptions Page 9

10 Analysis of cost vs benefit of pursuing incentives Costs include: Political costs (e.g., negative press) Application, approval and ongoing compliance costs Outside consultant costs (site selection, lawyers, accountants and consultants) Benefits include: Money (reduced operating costs, access to capital) Political benefits (e.g., positive press) Partnering with state/local government Page 10

11 Federal tax incentives Page 11

12 Triggers of federal tax credits Activities driving federal credits: Operational activities: Hiring and training activities Agricultural chemical security Nontaxable use of fuels Research Manufacturing Investments in capital assets: Investment in low-income communities Restoration of certain buildings Creation of affordable housing Investments in sustainability: Investment in renewable energy property Production of renewable energy Energy-efficient capital improvements Page 12

13 Employer-provided child care credit Page 13

14 Internal Revenue Code (IRC) Section 45F employer-provided child care credit Federal credit equal to the sum of: Twenty-five percent of the qualified child care expenditures Ten percent of the qualified child care resource and referral expenditures Capped at $150,000 for any taxable year Available to exempt organization through a reduction in unrelated business income tax (UBIT) Permanently extended with a 20-year carryforward Able to look back to years opened under statute Page 14

15 Section 45F qualified child care facility Three criteria must be met: Qualified child care facility Qualified child care expenditures Qualified child care resource and referral expenditures Page 15

16 New markets tax credit (NMTC) Page 16

17 NMTC background Section 45D was enacted to encourage private sector equity investment in low-income communities. Investment must be made in low-income community. The NMTC is equal to 5% of the qualified investment for the first three years and 6% for the following four years, for a total tax credit equal to 39% of the qualified investment. The tax credit is monetizable, meaning that anyone can benefit from the program, including nonprofits and companies in a net operating loss (NOL) position. $5 billion is allocated for Page 17

18 NMTC NMTC allocation is awarded to a community development entity (CDE). CDE claims or monetizes a 39% tax credit for qualified investment in a low-income community (LIC). Forty-percent of the US is considered an LIC. CDE encourages investments in LICs by offering low-interest and forgivable loans to eligible businesses. Forgivable loans can represent a cash benefit of approximately 15% 20% of the capital expenditure of the project. Eligible business must locate a CDE with an allocation for a service area and mission aligned with such business s intended purpose. Eighty-five CDEs were awarded allocations in There are often several CDEs covering one area. Page 18

19 Ideal fact patterns Project needs to be in an LIC. LICs make up nearly 40% of US. Mapping resources are available. Project is highly likely to occur and demonstrates safe transactions. Project typically does not require meeting a but for test. Project costs are between $8 million and $30 million. Most CDE allocatees like to use allocation in $10 million blocks. Project has an economic development story. Multiplier effect must be considered. Project creates jobs (preferably blue collar jobs). Moving jobs from non-lic to LIC is considered job creation. Examples for health care facilities: Expansion project provides new services in LIC. Hospital or clinic is established in LIC. Page 19

20 Federal employment-related tax credits Page 20

21 Work Opportunity Tax Credit (WOTC) VOW to Hire Heroes Act of 2011 Expanded the WOTC to make a credit available to tax-exempt organizations hiring qualified veterans Federal credit of up to $6,240 per qualified veteran Credit based on qualified first-year wages paid to qualified veterans who began working for the organization on or after 11/22/2011 Applied against the employer s Social Security tax liability To claim the credit, qualified tax-exempt organizations to use Form 5884-C, Work Opportunity Credit for Qualified Tax- Exempt Organizations Hiring Qualified Veterans WOTC for qualified veterans hired before 1/1/2014 extended by American Taxpayer Relief Act of 2012 Page 21

22 Excise tax refunds Page 22

23 Hospitals organ retrieval flights Excise tax on transportation: 4261(a): 7.5% tax on amounts paid for taxable transportation of any person 4271(a): 6.25% tax on amounts paid for the taxable transportation of property 4261(g): No tax imposed under 4261 and 4271 on any emergency medical air transportation Page 23

24 Hospitals organ retrieval flights Chartered organ retrieval flights fall under emergency medical air transportation. Private Letter Ruling : Excise tax paid on transportation of persons and freight is refundable. Domestic charter flights to and from organ donation recovery sites constitute air transportation described in 4261(g). Any amount paid or received by company relating to such flights are exempt from the taxes imposed under 4261 and Many hospitals have not yet claimed these refunds. Look-back opportunity is available to the extent that returns can be amended (generally three years). Page 24

25 Sustainability overview Page 25

26 Reduce energy efficiency and Leadership in Energy and Environmental Design (LEED TM ) Page 26

27 Reduce sustainability activities/triggers Construction of new buildings Retrofits of existing buildings LEED TM certification of new buildings LEED TM certification of existing buildings Investment in energy-efficient lighting systems (fixtures, controls) Investment in energy-efficient heating, ventilation and air conditioning (HVAC) (boilers, chillers, controls) Investment in energy-efficient building envelope (insulation, windows, roof) Designing/engineering related to government-owned buildings Investments in improvements to historic buildings Strategies to reduce peak-load demand Page 27

28 Section 179D Page 28

29 IRC Section 179D deduction overview Federal tax deduction of $0.30 to $1.80 per square foot of the building up to the total basis of the energy-efficient property placed in service Energy-efficient commercial building property: Light fixtures and controls, not light bulbs New or replacement HVAC systems and controls New buildings or replacement windows, roofs and doors Property to meet energy-efficiency targets (compared to American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) Standard ) and prescriptive requirements Effective January 1, 2006 through December 31, 2013 Revision of the incentive as part of the Better Building Initiative proposed by President Obama Page 29

30 IRC Section 179D value and benefit Property Energy efficiency (compared with ASHRAE Standard ) Benefit (per sq. ft.) Lighting (LPD) 25% 40% LPD reduction $0.30 $0.60 Lighting (energy modeling) 20% energy cost reduction $0.60 HVAC/hot water (HW) 20% energy cost reduction $0.60 Building envelope 10% energy cost reduction $0.60 Lighting + HVAC/HW + envelope 50% energy cost reduction $1.80 Value of 179D deduction at 35% effective tax rate Lighting only HVAC, building envelope, lighting 200,000 sq. ft. building $21,000 $42,000 $126, ,000 sq. ft. building $52,500 $105,000 $315,000 1,000,000 sq. ft. building $105,000 $210,000 $630,000 2,000,000 sq. ft. building $210,000 $420,000 $1,260,000 Source: Ernst & Young LLP Page 30

31 Certification requirements Energy modeling: Model the building with the minimum requirements of ASHRAE (formerly the American Society of Heating, Refrigerating and Air Conditioning Engineers) Standard ; then compare to actual installation to calculate percentage of reduction in energy costs Third-party site inspection: After the property has been placed in service Confirming that the building has met, or will meet, the energysaving targets and prescriptive measures contained in the design plans and specifications Letter of certification: By an engineer or contractor properly licensed in the jurisdiction in which the building is located Page 31

32 IRC Section 179D deduction government allocation The 179D tax deduction can be allocated by a government entity to the designer of a government-owned building. Government-owned building: Federal, state or local government or a political subdivision May include university hospitals and medical schools Designer Person who creates the technical specifications for installation of energy-efficient commercial building property May include architect, engineer, contractor, environmental consultant or energy services provider who creates the technical specifications for a new building or an addition to an existing building Page 32

33 Green building (LEED ) LEED TM is a green building certification. The LEED TM rating system is a voluntary, consensusbased national standard for high-performance, sustainable buildings. Members of the U.S. Green Building Council (USGBC), representing all segments of the building industry, developed LEED TM and continue to contribute to its evolution. The USGBC is not associated with the federal government and is a tax-exempt organization. Page 33

34 LEED TM for New Construction (NC) LEED TM -NC is a one-time certification. Higher certification levels can be achieved by earning additional points. LEED TM -NC evaluates and recognizes the performance of buildings in five accepted green design categories: Sustainable sites Water efficiency Energy and atmosphere Materials and resources Indoor air quality Page 34

35 A sample of LEED TM incentives in the US King County, WA grants OR business energy tax credit Indianapolis and Marion Counties, IN 30% rebate IA tax credit Il partial funding Cincinnati, OH 100% property tax exemption NY 10% increase on other incentives NV partial abatement of property tax Southern California Cities financial incentives NM Sustainable building tax credit Anchorage, AK permitting fees refund SLC, UT expedited plan reviews VA separate class of taxation Monroe County, NY tax abatement extension MD Baltimore, Carroll, Howard and Montgomery Counties property tax credit Chatham County, GA property tax and county tax abatement Honolulu, HI property tax abatement Longmont, CO fee rebates Chandler, AZ LEED TM fee reimbursement Source: Ernst & Young LLP El Paso, TX grants for commercial buildings Harris County, TX partial tax abatement Florida cities financial incentives, higher densities Page 35

36 LEED TM for Existing Buildings (LEED TM -EB) LEED TM has concentrated on new construction, but existing buildings certified under LEED TM -EB have proven to lower operational costs. The most important aspect when considering LEED TM -EB is energy efficiency. Efficiency is measured through the United States Environmental Protection Agency s Energy Star Portfolio Manager. If a prospective building s energy efficiency is at top quartile performance, LEED TM -EB is much easier to achieve and/or a higher LEED TM level may be pursued. Buildings that are already energy efficient may require very little beyond the required documentation and adoption of policies and procedures to meet LEED TM -EB requirements. Page 36

37 Incentives for LEED TM -EB Incentives available for the retrofit and adoption of policies and procedures in areas of three states: Nevada (property tax abatement) Maryland (property tax credit) Virginia (reduced property tax rate) Other incentives: Grants Registration and certification fee reimbursement Enhanced market values Branding/marketing Utility rebates 179D/48 Page 37

38 State and utility incentives Page 38

39 State and utility incentives overview Vary greatly by state: Corporate tax credits Sales tax exemptions Property tax exemptions Utility rebates/production incentives Grants Loans Page 39

40 Utility incentives overview There are three major types of incentive programs: Prescriptive measures basic $30 per light fixture, $20 per occupancy sensor, $100 per ton HVAC Generally a menu for predetermined equipment and amounts Applies to more basic, simple measures lighting, HVAC, controls Custom measures intermediate Usually covers what the prescriptive programs don t, similar pay scale Customer to define, measure and validate the energy savings Opportunities for industrial equipment and more creative measures Demand response/load curtailment advanced Customer commitment to utility on an annual basis When utility calls, customer to shed the agreed-upon load Page 40

41 Switch sustainability activities/triggers Conversion of diesel/gasoline vehicles to alternative fuels (electric/compressed natural gas/liquified natural gas) Investment in alternative fuel vehicle infrastructure Investment in renewable energy assets (solar, wind, geothermal) Capture of waste heat for heat-intensive processes Investment in distributed generation assets: fuel cells/micro turbines Investment in distributed generation assets: combined heat and power/cogeneration Use of alternative fuels Reduction of diesel emissions: fleet replacement, retrofits, antiidling measures Use of on-site generators (fuel cells/diesel) Purchase of alternative fuel vehicles Page 41

42 Section 48 Page 42

43 Definition of renewable energy Any energy resource that is naturally regenerated over a short time scale and derived: Directly from the sun (water heating, thermal electric, photovoltaic, thermal process heat) Indirectly from the sun (such as wind and photosynthetic energy stored in biomass) From other natural movements and mechanisms of the environment (such as hydrokinetic power, geothermal and tidal energy) Or From organic waste (landfill gas, waste-to-energy) Expanded definition in 2008 tax incentive legislation includes distributed generation technologies such as: Micro turbines Fuel cells Combined heat and power (CHP) or cogeneration Renewable energy does not include energy from fossil fuels or inorganic waste. Renewable energy is considered distributed when the generated energy is sold directly to the user. Page 43

44 Renewable energy investment tax credit (ITC) (Section 48) Equal to the energy percentage (30% or 10%) of the basis of each energy property placed in service during tax year 30% tax credit for: Solar energy, fuel cells, small and eligible large wind, closed and open loop biomass and other eligible renewable systems 10% tax credit for: Geothermal, micro turbine, CHP and thermal ground-water energy ITC in lieu of renewable electricity production tax credit (PTC) Facilities eligible for the Section 45 PTC to receive the 30% ITC under Section 48 Wind, closed-loop biomass, open-loop biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy Page 44

45 Monetization of tax credits Page 45

46 Monetization of tax credits Many tax credits can be monetized as long as the monetization structure is in place prior to credit generation. Why would organization monetize the tax benefits from a transaction? Organization unable to use the tax benefits efficiently Tax-exempt organization, NOL or alternative minimum tax position How does organization accomplish this? Partnership flip structure Sale and leaseback structure Master tenant structure Page 46

47 Monetization of tax credits The credits are supposed to assist an investor in achieving return and are therefore considered to be the same as pretax return for purposes of economic substance, etc. Credits Sec. 47 historic rehabilitation credit Sec. 48 investment tax credit State tax credits Page 47

48 PACE financing Page 48

49 Introduction Property Assessed Clean Energy (PACE) financing is an alternative way to fund energy efficiency and renewable energy upgrades Lighting and HVAC upgrades Solar, wind, geothermal PACE financing provides: Up to 100% financing for projects Zero up-front cost Immediate energy savings The local municipality or county provides the initial capital required for the project, and property owners can repay these loans through an increased property tax assessment for the property. Page 49

50 PACE financing models Municipal bond-funded model: The local government issues municipal bonds to raise funds. These funds are then issued to applicants in the form of loans. Model is commonly used by cities financing a large number of smaller projects. Open-market/owner-arranged programs: Projects are financed individually through a capital provider of choice, municipal bonds or a combination of the two. The private funder is repaid through an assessment on the property taxes as arranged with the city. Turnkey financing programs: These programs have one private financing option that is arranged by the program s administrator. Open-market and turnkey programs are commonly used to finance retrofits in larger buildings. Page 50

51 How is PACE financing utilized? Step 1: State and local governments enact required legislation. Step 2: Participating property owners identify energy upgrades or renewable energy projects. Step 3: Property owner determines the required investment and approaches the local government to secure a PACE-financed loan. Step 4: Property owner agrees to repay the loan through an increased property tax assessment for up to 20 years. Page 51

52 Costs and benefits of PACE financing Costs: Costs associated with introducing the necessary legislation Administrative fees required to implement PACE financing Legal and underwriting fees, bond counsel and issuance fees Benefits: Provides property owners easy access to capital for energy efficiency and renewable energy projects Loans to the property, rather than the owner, thereby allowing owners to implement the projects even if they do not expect to stay in the property for the duration of the repayment Allows property owners to reap immediate benefits of lower utility bills and reduced emissions, while repaying the loan over 20 years Typical interest rates between 3% and 7% Page 52

53 Legislative updates Page 53

54 FY 2014 budget extenders largely left out Unlike previous budgets, the FY2014 proposal does not include an extension of most of the tax extenders set to expire at the end of December In an apparent reference to the extenders, the budget states that the president s proposal for revenue-neutral reform would prevent hundreds of billions of dollars from being added to the deficit if the Congress continues to extend temporary business tax incentives without paying for them. Office of Management and Budget Acting Director Jeff Zients said the tax extenders must be gotten rid of or paid for through revenue-neutral tax reform. Page 54

55 Questions? Page 55