Financing Energy Related Facilities; Tax Credits Generally

July 14, 2010

Solar Panel Array

Topics addressed in this posting:

  1. New Clean Renewable Energy Bonds
  2. Qualified Energy Conservation Bonds
  3. Renewable Energy Production Tax Credits (PTC)
  4. Energy Investment Tax Credits (ITC)
  5. Renewable Energy Grants
  6. Common Ownership Structures and Tax Issues
  7. Claiming Investment Credits
  8. Other Matters

1.  New Clean Renewable Energy Bonds:

[To come]

2.  Qualified Energy Conservation Bonds:

Issuers must be states, political subdivisions and entities empowered to issue bonds on behalf of any such entity.  Issuer also include conduit issuers.  QECBs must be used for one or more “qualified conservation purpose,” including the following:

  • Capital expenditures for (i) reducing energy consumption in publicly owned buildings by at least 20 percent, (ii) implementing green community programs, (iii) rural development involving the production of electricity from renewable energy sources, or (iv) facilities eligible to be funded by NCREBs (except for Indian coal and refined coal production facilities);
  • Expenditures (not limited to capital expenditures) with respect to research facilities, and research grants, to support research in (i) development of cellulosic ethanol or other nonfossil fuels, (ii) technologies for the capture and sequestration of carbon dioxide produced through the use of fossil fuels, (iii) increasing the efficiency of existing technologies for producing nonfossil fuels, (iv) automobile battery technologies and other techologies to reduce fossil fuel consumption in transportation or (v) technologies to reduce energy use in buildings; and
  • Certain mass commuting facilities, demonstration projects and public education campaigns to promote energy efficiency.

3.  Renewable Energy [Electricity] Production Tax Credit (PTC):

Section 38 of the Code (setting forth permissible business tax credits) currently expressly permits the inclusion in total tax credits the “renewable electricity production credit” (PTC) under Section 45(a) of the Code.  Here is a summary of the PTC:

Under present law, an income tax credit of 2.1 cents/kilowatt-hour is allowed for the production of electricity from utility-scale wind turbines, geothermal, solar [* See note below], hydropower, biomass and marine and hydrokinetic renewable energy plants. This incentive, the renewable energy Production Tax Credit (PTC), was created under the Energy Policy Act of 1992 (at the value of 1.5 cents/kilowatt-hour, which has since been adjusted annually for inflation)


The PTC was originally introduced in 1992 pursuant to the Energy Policy Act of 1992, referenced above.  The American Jobs Creation Act of 2004 (H.R. 4520) expanded the PTC to include additional resources, including solar energy, in addition to then existing resources permitted under the PTC.  The Energy Policy Act of 2005 (EPAct 2005), however, removed solar energy resources from the PTC’s scope.  The Wikipedia description incorrectly states that the PTC is still available for solar projects.  See Section 45(d)(4) of the Code. An election may be made to take the Energy ITC (see below) instead of the PTC.

Also note that the Energy ITC and PTC is not available with respect to property in which a Section 1603 “Renewable Energy Grant.”  See Section 48(d).  See also, generally:

Refined Coal:  PLR 201430008, 201430009 and 201430010

4.  Renewable Energy/Federal Business Energy Investment Tax Credit (ITC):

Section 38 of the Code (setting forth permissible business tax credits) currently expressly permits the inclusion in total tax credits the “investment tax credits” (ITC) under Section 46 of the Code.  ITCs include five types of credits.  The Energy credit ITC is summarized below and is more fully described in Section 48 of the Code:

This investment tax credit varies depending on the type of renewable energy project; solar, fuel cells ($1500/0.5 kW) and small wind (< 100 kW) are eligible for credit of 30% of the cost of development, with no maximum credit limit; there is a 10% credit for geothermal, microturbines (< 2 MW) and combined heat and power plants (< 50 MW). The ITC is generated at the time the qualifying facility is placed in service. Benefits are derived from the ITC, accelerated depreciation, and cash flow over a 6-8 year period.


The construction, reconstruction or erection of the property must be done by the taxpayer, or the original use must be with the taxpayer if the taxpayer acquires the property.   Property qualifies only if depreciation (or amortization) is allowable.  The credit does not apply to the portion of the basis of any property that is attributable to qualified rehabilitation expenditures (another type of ITC set forth in Section 47 of the Code).  There are a number of coordination rules with the PTC in Section 45 that need to be adhered to.

Also note that the basis of the property (upon which the credit is calculated) is reduced if the property is financed in whole or in part by (a) subsidized energy financing or (b) tax-exempt private activity bond proceeds (within the meaning of Section 141).  The reduction equals = basis of the property * (basis of the property allocable to such financing or proceeds / total basis of the property).  “Subsidized energy financing” means financing provided by federal, state or local program that aims to provide subsidized financing for projects designed to conserve or produce energy.  But see subparagraph (D) which states that this limit is not applicable to periods after December 31, 2008.

Also note that the Energy ITC and PTC is not available with respect to property in which a Section 1603 “Renewable Energy Grant.”  See Section 48(d).  See also, generally:

Currently (July 2014), I.R.C. 48(a) provides for an energy credit equal to 30% of the cost basis of qualifying energy property placed in service before January 1, 2017.

See IRS Notice 2013-29 regarding when construction begins for purposes of the limitations contained in Section 48 that construction begin by December 31, 2013.  The notice includes discussion of the 5% safe harbor for determining the begin of construction.

PLR 201426013 (Mar. 19, 2014):  Relates to a partnership in Puerto Rico and the restriction contained in I.R.C. 50(b)(1)(A).  Partnership operates solar energy facilities in Puerto Rico.  The facilities are not eligible for the PTC under I.R.C. 45.  Ruling requested that, (1) assuming that Partnership is regarded as a valid partnership for federal tax purposes and that each partner will be regarded as a valid partner, each partner will be regarded as an owner and user of the facilities to the extent of its respective share of the basis of each facility for purposes of I.R.C. 50(b)(1)(B) and, therefore, will be entitled to share of the energy credit in accordance with Treas. Reg. 1.46-3(f), and (2) to the extent each partner is so regarded, the facilities will not be ineligible for the energy credit by I.R.C. 50(b)(1)(A).

5.  Renewable Energy Grants (Section 1603 Grants):

Preliminary Caution: The Renewable Energy Grant (Section 1603 Grant) is available only to tax-paying entities. Federal, state and local government bodies, non-profits, qualified tax energy credit bond lenders and cooperative electric companies are not eligible to receive this grant. Partnerships and pass-through entities for the organizations described above are also not eligible to receive this grant, except in cases where the ineligible party only owns an indirect interest in the applicant through a taxable C corporation.

The Section 1603 Grant arises from the American Recovery and Reinvestment Act of 2009, and was extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853).  The grant is available to taxpayers who qualify for the Energy ITC or the PTC (each described above), and may be received in lieu of the Energy ITC or PTC (See Section 48(d) of the Code).  The grant is not included in the gross income of the taxpayer.  Certain recapture provisions apply with respect to credits taken prior to election of the grant.

For solar-related property, the grant is equal to 30% of the basis of the property.  Solar-related property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat.  Passive solar systems and solar pool heating systems are not eligible.  Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are also eligible.

In order to qualify for the grant with respect to particular qualifying property, construction must begin before January 1, 2012.  Construction begins as soon as the applicant has incurred or paid at least 5% of the total cost of the property, excluding land and certain preliminary planning activities.

Grant applications must be submitted by October 1, 2012. The U.S. Treasury Department is to make determinations of grants within 60 days of the grant application date or the date the property is placed in service, whichever is later.

See also the following sources of information:

6.  Common Ownership Structures and Tax Issues

Certain of the matters discussed under this heading are based on the helpful publication by Novogradac & Company available online.

The three most common structures for renewable energy financings are:

  1. Partnership Flip Structure
  2. Master-Tenant/Lease Pass-Through Structure (Inverted Lease)
  3. Sale/Leaseback

Partnership Flip Structure.  In this structure, the developer is the GP (general partner) and the investor (e.g., a bank) is the LP (limited partner) of the property owner partnership.  The property owner owns and operates the renewable energy facility.  This structure originated with wind energy facility financings and has been used successfully in connection with other types of financings.

Master-Tenant/Lease Pass-Through Structure.  In this structure, the developer is the GP of the developer/property owner partnership. The property owner/partnership, as lessor, leases the facility to a master-tenant lessee, which is a partnership with the investor as the LP.  Pursuant to election by the lessor, the tax credits flow through to the lessee entity.  The lessee entity is a partnership in the lessor entity and contributes capital to the lessor to be used to construct the project.  This structure is said to have originated in historic tax credit transactions.

Sale/Leaseback.  In this structure, the developer constructs the facility and sells it to the investor. The investor immediately leases it back to the developer for operation. The developer makes lease payments to the investor.  The investor, as owner, taxes the tax credits and all other benefits. The structure might not be applicable for production tax credits, but apparently can be used for investment tax credits and the Section 1603 Grant.

Tax Issue: Rev. Proc. 2007-65.  This Revenue Procedure establishes the requirements (the Safe Harbor) under which the IRS will respect the allocation of sec. 45 wind energy production tax credits by partnerships in accordance with sec. 704(b).  Novogradac suggests that this Revenue Procedure applies in connection with other renewable energy financings, too, absent other guidance.  The Safe Harbor is intended to simplify the application of sec. 45 to partners and partnerships that own and produce electricity from qualified wind energy facilities.

Sec. 704(b) states that, while a partner’s distributive share of tax items may be determined by the partnership agreement under subsection (a), if either the partnership agreement does not discuss distributive shares or the distribution set forth in the agreement does not have “substantial economic effect,” the allocation must be determined in accordance with the partner’s interest in the partnership.

The Safe Harbor only applies if the Developer, Investor and Project Company satisfy each and every requirement in section 4 of the revenue procedure, addressing the following matters:

  1. Partners’ Minimum Partnership Interest:  Developer must have a minimum of 1% interest in each material item of partnership income, gain, loss, deduction and credit.
  2. Investor’s Minimum Unconditional Investment: The Investor must make a minimum unconditional investment in the Project Company and maintain the investment during the duration of its ownership of its partnership interest in the Project Company.  The Investor may not be protected against loss of any portion of the investment.
  3. Contingent Consideration
  4. Purchase Rights: Neither Developer nor Investor may have a contractual right to purchase the wind farm at any time at a price less than its FMV, and the Developer may not have a right to purchase the wind farm or an interest in the Project Company earlier than 5 years after the qualified facility is first placed in service.
  5. Sale Rights:  The Investor cannot have a right to cause any party to purchase its partnership interest in the Project Company
  6. Guarantees and Loans
  7. Allocation of Sec. 45 PTC
  8. Separate Activities for Purposes of Sec. 469

7. Claiming the Credit:

Use Form 3468 to claim the investment credit.  The investment credit consists of not only the renewable energy investment credit but also the rehabilitation, qualifying advanced coal project, qualifying gasification project, qualifying advanced energy project and qualifying therapeutic discovery project credits.

If you lease the property to someone else, you may elect to treat all or part of your investment in new property as if it were made by the person who is leasing it from you.  Once the election is made, the lessee will be entitled to an investment credit for that property for the tax year in which the property is placed in service and the lessor will generally not be entitled to such a credit.

8. Other Matters:

Depreciation and Power Purchase Agreements:  “Value of Power Purchase Agreements May Significantly Increase Tax Benefits of a Renewable Energy Facility,” May 7, 2012, available online at (reporting on PLR 201203003). “In the Letter Ruling, the IRS concluded that a taxpayer, who purchased a wind energy facility subject to a facility-specific PPA, was not required to treat the PPA as a separate asset. Accordingly, the portion of the purchase price attributable to the value of the PPA would be taken into account in determining the basis of the wind energy facility for purposes of calculating depreciation. Thus, the cost of acquiring the facility, including the PPA, could be recovered over the class lives of the facility’s depreciable property and no costs would be allocated to the PPA.”

Tolling Agreements:  A tolling agreement is an agreement whereby a “toller” agrees with an owner of raw materials to process the raw materials for a specified fee (a “toll”) into a product with the raw material and product remaining the property of the provider of the raw material.  (Tolling agreement may also be an agreement that has the effect of tolling or suspending the course of a fixed period of time.)

EP&C Agreements:  This is an acronym for “Engineering, Procurement and Construction” agreements.

Megawatt:  A watt is a unit of power.  It is defined as 1 joule per second, and measures the rate of energy conversion or transfer.  A megawatt is equal to one million watts.  A large residential or commercial building may consume several megawatts in electric power and heat.  The productive capacity of electrical generators if often measured in megawatts.  A typical wind turbine has a power capacity of 1-3 MW.  U.S. nuclear power plans have net summer capacities between 500 and 1300 MW.  A gigawatt is equal to one billion watts (or 1,000 megawatts).  The installed capacity of wind power in Germany was 25.8 GW.  If a light bulb has a power rating of 100 watt-hours, this means it consumes 100 watt in one hour.  The watt second is a unit of energy, equal to one joule.

BTU:  British Thermal Unit:  This is a traditional unit of energy equal to about 1,055 joules.  It is approximately the amount of energy needed to heat 1 pound of water.  The unit is used most often in power, steam generation, heating and air conditioning industries.  In scientific contexts, the BTU has largely been replaced by the joule, but is still used as a measure of agricultural energy production.

Notices and other IRS Publications:

Notice 2009-52: Procedure for electing energy tax credit in lieu of production tax credit. See this client alert for more background information.

Announcement 2009-69: Announcement on safe harbors and guidance concerning Rev. Proc. 2007-65.  See this client alert for more background information.

IRS Notice 2006-88: Electricity Produced from Open-Loop Biomass. Addresses what a biomass facility is and what biomass is. Also discusses sale requirement to unrelated parties and sale where steamboat commingled with non-biomass facilities, and how to distinguish between the biomass produced electricity and the non-biomass electricity.

Section 48(d) prior to the 1990 tax act: Click here.

AM2011-004: Memorandum of the Office of Chief Counsel relating to excessive payments under the Section 1603 Grant.

Selected 1603 Grant Materials by Chadbourne: Click here.

Production Tax Credits and New CREBs (I.R.C. 45)

June 23, 2009

Is the Section 45 renewable energy production tax credit reduced for an issuer that issues taxable New Clean Renewable Energy Bonds (“New CREBs”)? Do New CREBs constitute “subsidized energy financing” within the meaning of Section 45(b)(3)(A)(iii)? Certain rumors suggest that the Department of the Treasury will be issuing a notice or ruling of some type in the near future clarifying this point. The probable conclusion may indicate that New CREBs are to be considered “subsidied energy financing.”

The production tax credit was authorized by the Energy Policy Act of 1992 and is considered the most significant factor behind the growth of utility-scale wind energy.  The credit is currently 2 cents per kilowatt-hour on corporate income tax for electricity generated by qualified energy projects. The credit is available for the first ten years of operation and is adjusted annually for inflation.

For a general overview of Section 45 production tax credits and Section 48 investment tax credits, see this presentation by Greenberg Traurig. For a general discussion of investment tax credits and renewable energy production tax credits, see also IRS Notice 2009-52.

See also this KPMG memorandum regarding expiration dates.