BASIC STRUCTURING AND TAX BENEFITS OF SOLAR INVESTMENTS

Federal tax credits for solar energy, known as the investment tax credit, is for persons who make investments in and own qualifying renewable energy property.  A 30 percent tax credit is available for the fully installed cost of a solar energy system that generates electricity.  

Solar projects can be syndicated as a means of turning the tax credits and other deductions associated with the project into a source of funds to complete the project.  Two structures are commonly used to syndicate a solar project. The first is a sale-leaseback of the solar equipment, under which the developer of the project creates a special purpose entity (SPE) to construct and hold a project. The SPE sells the project to a tax investor, who then leases the project back to the SPE. The tax investor, as the owner of the project for federal income tax purposes, is entitled to claim the tax credits associated with the project and any other deductions, such as depreciation, relating to the project.   The SPE, as the lessee of the project, then enters into a power purchase agreement with the power purchaser (i.e., the end user of the electricity generated by the project).  The SPE uses the revenue from the sale of power to pay rent to the tax investor under the lease between the SPE and the tax investor.  The tax investor also takes an assignment of the power purchase agreement to secure the SPE's performance under the lease.

The other structure commonly used to syndicate a solar project is known as a partnership-flip structure, in which the developer of the project and the tax investor are partners in a partnership that owns the solar project. The partnership is entitled to claim the tax credits and other deductions associated with the project, which are allocated 99 percent to the tax investor, generally, in years one through five of the life of the project, and 1 percent to the developer of the project.   Sometime after the fifth anniversary of the date the project is placed in service, the allocations flip in favor of the developer so that it is entitled to almost all of the revenue streams associated with the project and the tax investor's interest is minimized. As in the sale-leaseback structure, the partnership enters into a power purchase agreement (PPA) with the power purchaser.  

The tax credits and other tax benefits resulting from a renewable energy project would be lost if the tax-exempt organization owned the project. However, the tax credits will be available in a sale-leaseback or partnership flip structure to a tax investor, provided that the PPA is respected as a service contract for federal income tax purposes instead of a lease or partnership arrangement.   Tax credits are more valuable than deductions for federal income tax purposes because a credit is a dollar-for dollar offset against a taxpayer's tax liability, while a deduction lowers the income on which tax is figured.

Accelerated Depreciation is one of the other tax benefits of a renewable energy project.  Under the modified accelerated cost recovery system (MACRS), solar electric technologies are classified as five-year property, which means that the cost of the equipment can be depreciated for federal income tax purposes over a six-year schedule.

The Emergency Economic Stabilization Act of 2008 included a 50 percent "bonus" depreciation provision for eligible renewable energy systems acquired and placed in service in 2008. This provision was extended (retroactively to the entire 2009 tax year) by the American Recovery and Reinvestment Act of 2009. If renewable energy property is eligible for bonus depreciation, the taxpayer can deduct 50 percent of the cost of the property in 2009, with the remaining 50 percent depreciated over the MACRS depreciation schedule. Bonus depreciation will not be available in 2010, and future periods absent congressional action to extend the provision. 


State tax issues are also present in any renewable energy project. It is important to consider the availability (or lack thereof) of any state incentives (tax credits, rebates, production payments, RPS compliance)  for renewable energy.  Many states now exempt solar energy equipment from sales tax as well as provide property tax exemption for renewable energy systems.