2018 Deloitte Renewable Energy Seminar Scaling new heights August 15-17, 2018

Transcription

1 2018 Deloitte Renewable Energy Seminar Scaling new heights August 15-17, 2018

2 Tax reform, tax extenders, and technical corrections Gary Hecimovich, Partner, Deloitte Tax LLP Tom Stevens, Partner, Deloitte Tax LLP, Dave Yankee, Managing Director, Deloitte Tax LLP Joe Zenk, Managing Director, Deloitte Transactions and Business Analytics LLP

3 Discussion Topics Recent federal income tax legislation Limitation on deductibility of net business interest expense (Section 163(j)) Bonus depreciation (Section 168(k)) Extenders Contributions in aid of construction ( CIAC ) Base erosion and anti-abuse tax ( BEAT ) Qualified opportunity zones ( QOZ ) Revenue recognition (Section 451) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 3

4 Recent federal income tax legislation Significant provisions affecting renewable energy investments Tax Cuts and Jobs Act ( TCJA ) (P.L ) Despite proposals to eliminate or modify many tax credits, most left unchanged New considerations including Bonus Depreciation, BEAT, AMT, NOLs QOZ incentives Bipartisan Budget Act ( BBA ) of 2018 (P.L ) Extensions or expansions of most federal tax credits Tax Technical Corrections Act of 2018 (P.L ) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 4

5 Limitation on deductibility of net business interest expense Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 5

6 Limitation on deductibility of net business interest expense Section 163(j) Limits the deduction for business interest to the sum of The business interest income of the taxpayer for the taxable year 30 percent of the adjusted taxable income of the taxpayer for the taxable year, and The floor plan financing interest of the taxpayer for the taxable year Adjusted taxable income is computed without regard to For all tax years Any item of income, gain, deduction, or loss which is not properly allocable to a trade or business, Any business interest or business interest income, The amount of any Section 172 net operating loss deduction, and The amount of any deduction allowed under Section 199A related to qualified business income For tax years beginning before January 1, 2022 Any deduction allowable for depreciation, amortization, or depletion Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 6

7 Limitation on deductibility of net business interest expense Section 163(j) (continued) Permits disallowed interest deductions to be carried forward indefinitely, subject to certain restrictions applicable to partnerships Exceptions for certain industries and taxpayers with average gross receipts of $25 million or less Effective date applies to taxable years beginning after December 31, 2017 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 7

8 Section 163(j) interest deduction limitation Considerations Definition of business interest exclusions to the definition of a trade or business Computation of ATI exclusions for items not allocable to a trade or business Limitation determined at pass-through entity Consolidated return considerations Utilization of carryforward of disallowed business interest Modeling impact for pre-2022 tax years and impact of limitation based on EBIT Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 8

9 IRS Notice Proposed regulations to address the following areas Carryforward and treatment of disallowed interest under former Section 163(j) (Section 3 of the Notice) Treated as business interest paid or accrued in tax year beginning after December 31, 2017 Subject to new Section 163(j) Potentially subject to Section 59A (BEAT) Rules for allocation of business interest expense from an affiliated group under the prior super-affiliation rules Clarification that no excess limitation carryforward may be carried to tax years beginning after December 31, 2017 Characterization of C corporation business interest expense and income (Section 4 of the Notice) All interest paid or accrued of a C corporation as business interest and all interest includible as business interest income Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 9

10 IRS Notice Proposed regulations to address the following areas (continued) Consolidated Approach to section 163(j) (Section 5 of the Notice) ATI shall be determined based on consolidated taxable income Intercompany obligations will be disregarded for purposes of determining the limitation Allocations of interest expense limitation among group members Treatment if disallowed interest carryforward when members leave and join the group Application of new Section 163(j) to a consolidated group with one or more members that conduct an exempt trade or business Electing real property trade or business Electing farming business Regulated utilities Impact on E&P disallowance and carryforward of interest will not affect whether or when E&P is reduced (Section 6 of the Notice) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 10

11 Interest capitalization planning considerations TJCA legislative history confirms that interest capitalization provisions apply before the interest limitation of new section 163(j) When interest is capitalized, it loses its character as interest, and the interest limitations of new section 163(j) do not apply Capitalized interest becomes part of the basis of the asset, and is recovered through Depreciation or amortization Cost of goods sold (COGS) Offset to amount realized in a sale or exchange Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 11

12 Interest capitalization provisions Section 263A(f) Part of the uniform capitalization (UNICAP) rules Extensive and detailed regulations A method of accounting under sections 446 and 481 Section 266 Provision dates from 1942 Relatively little used Regulations are less detailed than the UNICAP rules Annual election Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 12

13 Limitation on deductibility of net business interest expense Transition issues facing regulated utilities IRS Notice forthcoming regulations (comments due May 31, 2018) Application of the limitation to a consolidated group with one or more members that conduct a trade or business excepted from the limitation and one or members subject to the limitation Scope of rates... established or approved by a... commission What is properly allocable? Allocate indebtedness Whether a pure allocation of consolidated interest must occur or whether separate company accounting, ratemaking and structure of acquisition indebtedness matter Is tracing permitted, required or prohibited? Holding company acquisition indebtedness How to compute and allocate adjusted taxable income Treatment of depreciation associated with manufacturing equipment treated as an inventoriable cost and deducted as cost of goods sold Do interest deductibility limitation computations constitute a method of accounting for tax purposes? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 13

14 TCJA description of utility trade or business Contrast Section 163(j)(7) with Section 168(i)(10) Section 163(j)(7)(A)(iv) utility industry exemption (7) TRADE OR BUSINESS. For purposes of this subsection (A) IN GENERAL. The term trade or business shall not include... (iv) the trade or business of the furnishing or sale of (I) electrical energy, water, or sewage disposal services, (II) gas or steam through a local distribution system, or (III) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative. Section 168(i)(10) public utility property definition Public utility property. The term "public utility property" means property used predominantly in the trade or business of the furnishing or sale of (A) electrical energy, water, or sewage disposal services, (B) gas or steam through a local distribution system, (C) telephone services, or other communication services if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 (47 U.S.C. 701), or (D) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 14

15 Public utility property Regulation Section 1.167(l)-(1)(b) Public utility property (1) In general. Under section 167(l)(3)(A), property is "public utility property" during any period in which it is used predominantly in a "section 167(l) public utility activity." The term "section 167(l) public utility activity" means the trade or business of the furnishing or sale of (i) Electrical energy, water, or sewage disposal services, (ii) Gas or steam through a local distribution system, (iii) Telephone services, (iv) Other communication services (whether or not telephone services) if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 (47 U.S.C. 701), or (v) Transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, are regulated, i.e., have been established or approved by a regulatory body described in section 167(l)(3)(A). The term "regulatory body described in section 167(l)(3)(A)" means a State (including the District of Columbia) or political subdivision thereof, any agency or instrumentality of the United States, or a public service or public utility commission or other body of any State or political subdivision thereof similar to such a commission. The term "established or approved" includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates, even though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer involved. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 15

16 Regulated public utility Section 7701(a)(33) Regulated public utility The term regulated public utility means: A. A corporation engaged in the furnishing or sale of i. electric energy, gas, water, or sewerage disposal services, or ii. transportation (not included in subparagraph (C)) on an intrastate, suburban, municipal, or interurban electric railroad, on an intrastate, municipal, or suburban trackless trolley system, or on a municipal or suburban bus system, or iii. transportation (not included in clause (ii)) by motor vehicle if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, by a public service or public utility commission or other similar body of the District of Columbia or of any State or political subdivision thereof, or by a foreign country or an agency or instrumentality or political subdivision thereof. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 16

17 Regulated public utility Section 7701(a)(33) (cont d) B. A corporation engaged as a common carrier in the furnishing or sale of transportation of gas by pipeline, if subject to the jurisdiction of the Federal Energy Regulatory Commission. C. A corporation engaged as a common carrier transportation by railroad, if subject to the jurisdiction of the Surface Transportation Board, or transportation of oil or other petroleum products by pipe line, if subject to [FERC] or if the rates for such furnishing or sale are subject to the jurisdiction of a public service or public utility commission or other similar body of the District of Columbia or of any State. D. telephone or telegraph service, if the rates. E. common carrier by air, subject to the jurisdiction of the Secretary of Transportation. F. transportation by a water carrier. G. A rail carrier H. A common parent corporation which as a common carrier by railroad Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 17

18 Regulated public utility Section 7701(a)(33) (cont d) The term regulated public utility does not (except as provided in subparagraphs (G) and (H)) include a corporation described in subparagraphs (A) through (F), inclusive, unless 80 percent or more of its gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from sources described in subparagraphs (A) through (F), inclusive. If the taxpayer establishes to the satisfaction of the Secretary that i. its revenue from regulated rates described in subparagraph (A) or (D) and its revenue derived from unregulated rates are derived from the operation of a single interconnected and coordinated system or from the operation of more than one such system, and ii. the unregulated rates have been and are substantially as favorable to users and consumers as are the regulated rates, then such revenue from such unregulated rates shall be considered, for purposes of the preceding sentence, as income derived from sources described in subparagraph (A) or (D). Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 18

19 Scope of regulated public utility exceptions Bonus depreciation and interest deduction limitation transition issues Trade or business v. entity v. asset Is a power plant that does not constitute public utility property for normalization purposes owned by a regulated, vertically-integrated utility part of a rate-regulated utility trade or business? Whether rates... established or approved has the same meaning in Section 163(j)(7) as it does for normalization purposes Significance of public utility property definitions under Section 167 and Section 46 regulations and private letter rulings PLRs , , , , and Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 19

20 Scope of regulated public utility exceptions examples Bonus depreciation and interest deduction limitation Power generation facility that sells all its output under a long-term power purchase agreement negotiated with a customer that is not a regulated public utility, but requires one-time permission from the Federal Energy Regulatory Commission ( FERC ) to enter the contract Power generation facility that sells all its output under a long-term power purchase agreement negotiated with customer that is a regulated public utility, with the utility customer reselling the power to its customers at prices set by its public utility commission Power generation facility that sells all its output on wholesale markets without a long-term power purchase agreement, but requires one-time permission from the FERC to conduct business in such a manner Interstate pipelines that compute a price based on traditional ratemaking principles, but with permission from the FERC, may and do negotiate market (discounted) rates with individual shippers (i.e., the price determined under cost-of-service, rate-of-return regulation serves as a cap and is not charged for some, most or all the transmission services provided) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 20

21 Bonus depreciation Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 21

22 Depreciation systems since 1986* Modified accelerated cost recovery system /50 percent bonus depreciation percent bonus depreciation percent bonus depreciation After September 27, 2017 Rate-regulated utilities 50%-40%-30% phase-down for property acquired before September 28, 2017, and placed in service in % expensing for property acquired after September 27, 2017, and placed in service in a tax year beginning before January 1, 2018 Other taxpayers 100% expensing through 2022 with phasedowns through 2026 (generally) 80%-60%-40%-20% phase-down for additions through 2026 * Reflects the general rules, not the transitional guidance under each depreciation system Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 22

23 TCJA bonus depreciation Anticipated guidance Whether 100% expensing is available to utilities for property acquired after September 27, 2017, and placed in service before January 1, 2018 Whether the election to apply pre-tcja rules for tax years including September 27, 2017, is available to utilities How to apply the effective date of TCJA Section 13201(h) to self-constructed property How to apply any TCJA effective date rules to a component of larger self-constructed property Definition or examples of a component of larger self-constructed property Whether taxpayers may rely on the proposed regulations for 2017 tax returns Scope of a Section 163(j)(7)(A)(iv) regulated utility trade or business Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 23

24 Qualified property Rate-regulated utilities Preamble to proposed regulations The proposed regulations provide that qualified property does not include... (6) property described in section 168(k)(9)(A) or (B). Section 168(k)(9) provides that qualified property does not include (A) any property that is primarily used in a trade or business described in section 163(j)(7)(A)(iv)... Section 163(j) applies to taxable years beginning after December 31, 2017 TCJA Section 13301(c) Accordingly, the exclusion of property described in section 168(k)(9) from the additional first year depreciation deduction applies to property placed in service in any taxable year beginning after December 31, Prop. Reg. Sec (k)-2 Additional first year depreciation deduction allowable under section 168(k) for qualified property acquired and placed in service after September 27, 2017 Prop. Reg. Sec (k)-2(a)(1) Property not eligible for additional first year depreciation deduction includes depreciable property described in section 168(k)(9)(A) and placed in service in any taxable year beginning after December 31, 2017 Prop. Reg. Sec (k)-2(b)(2)(ii) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 24

25 MACRS and bonus depreciation elections for 2017 Regulated utilities Election out of bonus depreciation Section 168(k)(7) In the case of qualified property placed in service by the taxpayer during the first taxable year ending after September 27, 2017, if the taxpayer elects to have this paragraph apply for such taxable year, paragraphs (1)(A) and (5)(A)(i) shall be applied by substituting "50 percent" for "the applicable percentage Section 168(k)(10) A taxpayer may make an election to deduct 50 percent, instead of 100 percent, additional first year depreciation for all qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its taxable year that includes September 28, 2017 Prop. Reg. Sec (k)-2(e)(3) Because section 168(k)(10) does not state that the election may be made with respect to any class of property as stated in section 168(k)(7) for making the election out of the additional first year depreciation deduction, the proposed regulations provide that the election under section 168(k)(10) applies to all qualified property The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership, or by the S corporation) Applies to all qualified property (not by class of property) Election to 150 percent declining balance depreciation Section 168(b)(2)(C) Election to use straight-line depreciation Section 168(b)(3)(D) Election to use ADS depreciation Section 168(g)(7) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 25

26 TCJA bonus depreciation effective date TCJA Section 13201(h) (h) EFFECTIVE DATE. (1) IN GENERAL. Except as provided by paragraph (2), the amendments made by this section shall apply to property which (A) is acquired after September 27, 2017, and (B) is placed in service after such date. For purposes of the preceding sentence, property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition. (2) SPECIFIED PLANTS. The amendments made by this section shall apply to specified plants planted or grafted after September 27, Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 26

27 Bonus depreciation effective dates Acquisition date requirement Pre-TCJA bonus depreciation Post-TCJA bonus depreciation Codified acquisition date requirement until the Protecting Americans from Tax Hikes Act of 2015 Reg. Sec (k)-1(b)(4) Acquired property Self-constructed property Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract... that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business (or for its production of income) is considered to be manufactured, constructed, or produced by the taxpayer. PLRs , and Components of larger self-constructed property Non-codified acquisition date in TCJA Section 13201(h) effective date provision Prop. Reg. Sec (k)-2(b)(5) Acquired property This paragraph (b)(5)(iv) does not apply to property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property... Self-constructed property Components of larger self-constructed property Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 27

28 Bonus depreciation Self-constructed property Pre-TCJA bonus depreciation Pre-PATH statutory rules for self-constructed property applicable to December 31, 2007, and January 1, 2014 Reg. Sec (k)-1(b)(4)(ii)(E) and (iii)(c)(1) Components acquired (or for which construction began) before the applicable date, but construction of the larger self-constructed property began after the applicable date Construction of larger self-constructed property began before the applicable date but components acquired (or construction of components began) after the applicable date. Component examples included turbines and power plants Rev. Proc Post-TCJA bonus depreciation Statutory rules for self-constructed property applicable to January 1, 2027 Prop. Reg. Sec (k)-1(b)(5)(iii)(F) and (iv)(c) Components acquired (or for which construction began) before the applicable date, but construction of the larger self-constructed property began after the applicable date Construction of larger self-constructed property began before the applicable date but components acquired (or construction of components began) after the applicable date. Fewer component examples Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 28

29 Bonus depreciation example (not longer production period property) Construction is completed Placed into service 9/27/ /31/2017 Construction work in progress balance Tax analysis Materials and supplies on hand Contract to acquire asset or components Identification of components and written binding contracts Costing of materials and supplies, construction work in progress, off-site construction of components The unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not satisfy the requirements Coordination with Section 45 begun construction rules Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 29

30 Bonus depreciation prior to the TCJA Longer production period property (LPPP) under former (pre-tcja) Section 168(k)(6) Key criteria from the definition of longer production period property Recovery period of at least 10 years or transportation property, Subject to Section 263A, and Interest capitalization criteria Estimated production period > 2 years OR Estimated production period > 1 year AND cost > $1 million Placed in service Recovery percentage percent (general rule), no special rule for LPPP percent (general rule), 40 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 30

31 Bonus depreciation Transition rules LPPP with pre-9/28/17 construction as amended by the TCJA TCJA amendment Section 168(k)(8) phase-down applies to qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after September 27, 2017 Act Section 13201(h) applies to property acquired after September 27, 2017, and placed in service after such date Placed in service Recovery percentage percent percent 2020 No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020 Section 168(k)(6) as in effect on the day before TCJA Placed in service Recovery percentage percent (general rule), no special rule for LPPP percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 31

32 Bonus depreciation Transition rules LPPP with pre-9/28/17 construction as amended by the TTCA of 2018 TCJA amendment Section 168(k)(8) phase-down applies to qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer after September 27, 2017 Act Section 13201(h) applies to property acquired after September 27, 2017, and placed in service after such date Placed in service Recovery percentage percent percent 2020 No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020 Tax Technical Corrections Act of 2018 amendment to Section 168(k)(6) as in effect on the day before TCJA Placed in service Recovery percentage percent percent 2020 No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 32

33 Bonus depreciation example (longer production period property) Payments made pursuant to construction contract Placed into service 9/27/ /31/ /31/ /31/2019 Taxpayer enters written binding contract and then contractor begins physical work of a significant nature Tax analysis Contractor continues construction Delivery, acceptance and title transfer How does the TCJA effective date apply to self-constructed property to be owned by a utility and placed in service in 2018? Characterization of the property produced by the contractor as self-constructed or acquired Components of larger self-constructed property 10 percent safe harbor for determining when construction begins and economic performance analysis Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 33

34 Proposed bonus depreciation regulations Rules affecting partnerships consideration of eligibility of used property Property placed in service and contributed to a partnership in the same taxable year If qualified property is transferred in a Section 721(a) transaction to a partnership that has as a partner a person, other than the transferor of property, who previously had a depreciable interest in the qualified property, in the same taxable year that the qualified property is placed into service by the partnership, the allowable additional first year depreciation deduction is allocated entirely to the transferor, prior to the Section 721(a) transaction, and not to the partnership Includes transactions described by Rev. Rul. 99-5, Situation 1 Property placed in service and disposed in the same taxable year, including technical terminations Amounts not eligible for Section 168(k) deduction Section 704(b) book basis of zero tax basis partnership property Section 704(b) book basis of property subject to the remedial Section 704(c) method (both contributed and revalued partnership property) Basis adjustments under Section 732 (distributed property) Basis adjustments under 734(b) (transferred property new or existing partners) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 34

35 Proposed bonus depreciation regulations Rules affecting partnerships consideration of eligibility of used property (continued) A new or existing partner s basis adjustment under Section 743(b) may satisfy the requirements of Section 168(k) for certain transfers of partnership interests after September 27, 2017 The partner acquiring an interest in the partnership must not be related to the transferor of the partnership interest The transfer must be one in which gain or loss could be recognized and The partner acquiring the interest (and its predecessors in interest, if any) must not have previously had any depreciable interest in the portion of the property deemed acquired to which the Section 743(b) adjustment is allocated Increases to the basis of partnership qualified property under Section 743(b) Aggregate view providing that each partner is treated as having a depreciable interest in the partner s proportionate share of partnership property for purposes of determining whether a Section 743(b) basis adjustment qualifies for Section 168(k) A partnership may elect not to deduct the additional first year depreciation for an increase in the basis of qualified property under Section 743(b) even if the partnership does not make such an election with respect to the partnership s other qualified property in the same class and vice versa Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 35

36 Extenders Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 36

37 Bipartisan Budget Act Significant provisions affecting renewable energy Extensions of energy credits A one-year extension of the section 25C nonbusiness energy property credit A five-year extension of the section 25D residential energy efficient property credit A one-year extension of the section 45 production tax credit ( PTC ) A one-year extension of the section 45L new energy efficient home credit A five-year extension of the section 48 energy investment tax credit ( ITC ) A modification of the section 45J credit for production from advanced nuclear power facilities A one-year extension of the section 30B alternative motor vehicle credit A one-year extension of the section 30C alternative fuel vehicle refueling property credit A one-year extension of the section 30D new qualified plug-in electric drive motor vehicles credit An extension and enhancement of the section 45Q carbon dioxide sequestration credit Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 37

38 Production tax credit and investment tax credit in lieu of production tax credit Qualified Resources/Facilities PTC Amount for 2018 Construction Beginning Phase-out (PTC Amount) Phase-out (ITC Election) Wind 2.4 cents/kwh Before 1/1/ % 30% Calendar % 24% Calendar % 18% Calendar % 12% Geothermal 2.4 cents/kwh Before 1/1/2018 None 30% Closed-loop biomass 2.4 cents/kwh Before 1/1/2018 None 30% Open-loop biomass 1.2 cent/kwh Before 1/1/2018 None 30% Municipal solid waste (landfill gas, trash) 1.2 cent/kwh Before 1/1/2018 None 30% Hydropower 1.2 cent/kwh Before 1/1/2018 None 30% Marine and hydrokinetic renewables (including small irrigation power) 1.2 cent/kwh Before 1/1/2018 None 30% Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 38

39 Commercial ITC section 48 Qualified Resources/Facilities ITC Rate Begun Construction Statutory Deadline Solar Fuel cell 30% Before 1/1/ % Calendar % Calendar % Calendar 2022 or placed in service after 12/31/ % Before 1/1/ % Calendar % Calendar % After calendar 2021 or placed in service after 12/31/2023 Stationary microturbine 10% Before 1/1/2022 Geothermal 10% Placed in service before 1/1/2017 Small wind 30% Before 1/1/ % Calendar % Calendar % After calendar 2021 or placed in service after 12/31/2023 Combined heat/power 10% Before 1/1/2022 Thermal 10% Before 1/1/2022 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 39

40 Contributions in aid of construction Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 40

41 Section 118 Evolution of statute Section 118 originated in the 1954 Internal Revenue Code Tax Reform Act of 1976 added former section 118(b) Effective for contributions after January 31, 1976 Treated CIAC (excluding customer connection fees) made to regulated water and sewage disposal utilities as nontaxable Revenue Act of 1978 Legislation was effective retroactively to January 31, 1976 Extended CIAC exclusion made to regulated public gas and electric utilities providing electric energy, gas and steam Tax Reform Act of 1986 Repealed Section 118(b) as it then existed making utility CIAC taxable Small Business Job Protection Act 1996 Added Section 118(c) to provide that excludable contribution to capital includes CIAC for regulated water and sewage disposal utilities operating in corporate form and providing services to the general public Tax Cuts and Jobs Act (2017) Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 41

42 Sections 61 and 118 Summary of statute Section 61(a) gross income means all income from whatever source derived, unless excluded by law Section 118(a) exclusion from gross income for any contribution to the capital of a corporate taxpayer Prior to the Tax Cuts and Jobs Act Section 118(b) exception from the term contribution to the capital of the taxpayer for any contribution in aid of construction from a customer or potential customer Section 118(c) the term contribution to the capital of the taxpayer includes contributions in aid of construction received by water and sewer utilities After the Tax Cuts and Jobs Act Section 118(b) amended to expand the exception from the term contribution to the capital of the taxpayer Any contribution in aid of construction or any other contribution as a customer or potential customer Any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such) Section 118(c) stricken Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 42

43 Tax Cuts and Jobs Act Other provisions affecting regulated utilities Non-shareholder contributions to capital v. contributions in aid of construction Section 118(a) general rule continues In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer Repeal of exclusions for certain contributions made after December 22, 2017 Water utilities Amounts from governmental entities or civic groups No impact on tax treatment of reimbursements or in-kind transfers addressed in IRS Notice Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 43

44 Section 118 amendments Tax Cuts and Jobs Act effective date Execute construction contract Receive amount charged for construction Begin construction Receive amount charged for construction Place asset into service Enactment date Effective date Effective date per House bill The amendments made by this section shall apply to contributions made, and transactions entered into, after the date of the enactment of this Act. Effective date per TCJA Section 13312(b) Generally applies to contributions made after the date of enactment Exception for any contribution made after the date of enactment by a governmental entity, which is made pursuant to a master development plan that has been approved prior to enactment date by a governmental entity Tax indemnification and gross-up language in contracts involving reimbursements Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 44

45 TCJA amendments to Section 118 Transition issues Identifying master development plans Tax indemnification and gross-up language in contracts involving reimbursements Determining which tax depreciation rules would apply to the contributed/reimbursed property if the transaction is taxable Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 45

46 Reimbursements for construction costs Tax gross-up factors Customer requests an extension of a line and will reimburse the utility for the $100,000 of construction costs How much should the utility charge to be made whole? Assumptions The receipt is taxable for federal and state tax purposes The composite tax rate is 25 percent The new asset is depreciable for tax purposes over 20 years Alternatives $100,000? $133,333 (to cover upfront tax costs)? $115,000 (to cover upfront tax costs but acknowledge the additional tax depreciation deduction to be realized over 20 years)? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 46

47 Tax gross-up of CIACs Impact of the Tax Cuts and Jobs Act Decrease in tax rate would decrease tax gross-up Loss of bonus depreciation would increase tax gross-up Tax gross-up = Current tax rate* x (gross income PV** of tax depreciation) 1 current tax rate Decrease in tax rate would decrease tax gross-up *Transmission provider s composite federal and state tax rates at the time payments or property transfers are received and subject to highest marginal rates at that time **Transmission provider s current weighted cost of capital Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 47

48 Standard interconnection agreements Tax issues Does the tax section of the interconnection agreement, including the tax representations, reflect Notice or the IRS notices that is supersedes? Does the agreement reflect an intent to classify the reimbursement or property transfer as a non-shareholder contribution to capital or as an excludable refundable advance under Rev. Proc ? Does the agreement address the potential tax consequences of retention of the interconnection facilities by the transmission company at the end of the power purchase agreement? If the facility is a storage facility without generation, is the wording of the agreement appropriate? Notice uncertainties Distribution-only interconnections PLR PLR Interconnections of energy storage facilities How to apply the five percent test Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 48

49 Section 118 method changes Rev. Proc Designated automatic accounting method change 129 Payments or property received that do not constitute contributions to the capital of the taxpayer within the meaning of Section 118 and the regulations thereunder, from excluding the payments or the fair market value of the property from gross income as nontaxable contributions to capital under Section118 to including the payments or the fair market value of the property in gross income under Section 61 Designated automatic accounting method change 226 Initial transfer of intertie Section 481(a) adjustment Termination of safe harbor cut-off method Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 49

50 Interconnections between electric generators and transmission utilities Termination of safe harbor upon termination of power purchase agreement Notice Upon the termination of a power purchase contract between a generator and a utility, if the utility obtains or retains ownership (for tax purposes) of the intertie, the generator will be deemed to have transferred the intertie to the utility as of the first day of such termination. Such a deemed transfer will not be treated as a CIAC, except in circumstances that indicate an intention by the parties to characterize a contribution of an intertie as a transaction that in substance constitutes a CIAC. Notice Upon the termination of the power purchase contract between a Qualifying Facility and a utility, if the utility obtains or retains ownership (for tax purposes) of property transferred in a QF transfer, the Qualified Facility will be deemed to have made a transfer to the utility which constitutes a CIAC under section 118(b) as of the first day of such termination. Notice Upon the termination of the power purchase contract between a Qualifying Facility and a utility, if the utility obtains or retains ownership (for tax purposes) of property transferred in a QF transfer, the Qualified Facility will be deemed to have made a transfer to the utility as of the first day of such termination. Such a deemed transfer will not be treated as a CIAC, except where circumstances indicate an intention by the parties to characterize as a QF transfer a transaction that in substance constitutes a CIAC. The utility shall include in income the fair market value of the property deemed transferred less the amount, if any, paid by the utility to obtain or retain ownership of the property for tax purposes. Therefore, if the amount paid by the utility is fair market value, no amount will be includible in income by the utility. The amount paid by the utility shall include any extension allowance or similar payment by the utility to the Qualifying Facility during the term of the power purchase contract. For this purpose, an extension allowance is a payment to compensate the Qualifying Facility in consideration of the anticipated use of the property by the utility to deliver power to customers other than the Qualifying Facility. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 50

51 Base erosion and anti-abuse tax Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 51

52 Recent federal income tax legislation Impact on investors in renewable energy facilities Base Erosion Anti-Abuse Tax ( BEAT ): Generally applies to corporations with: (1) average annual gross receipts for the 3-year period ending with the preceding taxable year are at least $500 million, and (2) payments to foreign related persons that exceed 3% of total deductions (2% for groups that include a bank or securities dealer) Imposes tax equal to the base erosion minimum tax amount calculated as: (1) 10% of modified taxable income (MTI) over (2) regular tax liability reduced by all tax credits other than the R&D credit and 80% of the lesser of (a) ITC, PTC and low income housing credit or (b) the base erosion minimum tax amount. MTI generally means taxable income less deductions claimed for payments made to foreign related persons After 2025, regular tax liability is reduced by all tax credits (e.g., PTC/ITC) The 10% of MTI amount is 5% for 2018 and 12.5% after 2025 The 5%, 10% and 12.5% amounts are increased to 6%, 11% and 13.5%, respectively, for affiliated groups that include a bank or securities dealer Impact and potential for legislative fix? Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 52

53 Example of use of GBCs against the BEAT Example 1.--Taxpayer has TI of 10,000, modified TI of 21,000, and no GBCs. Regular tax BEAT Taxable income 10,000 10,000 Base erosion payments -- 11,000 Modified taxable income 10,000 21,000 Rate Tax 2,100 2,100 Taxpayer is not subject to the BEAT, and pays tax of 2,100. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 53

54 Example of use of GBCs against the BEAT Example 2.-- Taxpayer has TI of 10,000, modified TI of 21,000, and 2,000 of energy credits. Regular tax BEAT Modified taxable income 10,000 21,000 Rate Tentative tax 2,100 2,100 Credits (1,575) (1,260) (1,575 x.80)** Tax Taxpayer is subject to the BEAT by virtue of having GBCs, and pays tax of 840 (525 regular tax plus 315 BEAT). The Taxpayer s GBC carryforward is 425 (2,000 1,575), despite having the benefit of the use of only 1,260 of credits to offset tax liability. On a dollar-for-dollar basis the value of the 315 of haircutted GBCs are permanently lost unless revived as a carryforward against future years tax liability. **also, (2, ) x.80 Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 54

55 Qualified opportunity zones Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 55

56 Opportunity zones Three types of potential benefits for program participants Deferral of gain from a sale or exchange of prior investments: Taxpayers may elect to temporarily defer from inclusion in gross income certain gains from the sale or exchange of an asset to the extent of the aggregate amount invested in a QOF during the 180-day period beginning on the date of the sale or exchange. The deferral lasts until the earlier of the sale or exchange of the QOF investment or December 31, Reduction of deferred gain from the sale or exchange of prior investments: After holding investments in QOFs for a specified period of time, taxpayers may receive a permanent reduction of the deferred gain originally realized equal to 10 percent (if QOF is held at least five years) or 15 percent (if QOF is held at least seven years) through a partial basis step-up (see examples below). Exclusion of gain from the sale or exchange of investments in QOFs: After holding investments in QOFs for a period of at least ten years, taxpayers may elect to receive a permanent exclusion of the appreciation of the QOF investment through a full basis step-up to the fair market value of the QOF investment on the date such investment is sold or exchanged. Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 56

57 Opportunity zones Examples of qualified opportunity zone benefits Investor keeps capital gains proceeds invested in the qualified opportunity fund for 5 years Investor re-invests $10,000 of gain proceeds into a QOF in 2018 within 180 days of disposition. QOF investment is held for 5 years, and sold in 2023 for $15,000. Basis in the QOF will be increased by an amount equal to 10% of the deferred gain, or $1,000. Upon disposition in 2023, Investor recognizes both: $9,000 of deferred gain net of $1,000 partial basis step-up, and 5,000 of gain determined with respect to the appreciation of the QOF investment. $14,000 total gain Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 57

58 Opportunity zones Examples of qualified opportunity zone benefits Investor keeps capital gains proceeds invested in the qualified opportunity fund for 7 years Same as above except QOF investment is held for 7 years, and sold in 2025 for $17,000. Basis in the QOF will be increased by an amount equal to 15% of the deferred gain, or $1,500. Upon disposition in 2025, Investor recognizes both: $8,500 of deferred gain net of $1,000 partial basis step-up, and 7,000 of gain determined with respect to the appreciation of the QOF investment. $15,500 total gain Copyright 2018 Deloitte Development LLC. All rights reserved Deloitte Renewable Energy Seminar 58