How to Provide Solar Power to Tax-Exempt Entitites in Missouri

Transcription

CLEAN ENERGY. CLEAR CHOICE.
How to Provide Solar
Power to Tax-Exempt
Entitites in Missouri
Abstract
This white paper explores the methodology, research and
process by which a solar lease can be used by tax-exempt
entities in Missouri and meet all regulations. Through its
BrighterLeaseTM program, Brightergy provides a regulatory
viable lease for tax-exempt entities. Any other lease product
that does not meet the criteria outlined in this whitepaper
should be examined carefully.
©2013. Brightergy, LLC
www.Brightergy.com
BRIGHTERGY HAS EXTENSIVE EXPERIENCE, HAVING
INSTALLED HUNDREDS
OF SOLAR ENERGY SYSTEMS. SOME OF OUR CLIENTS INCLUDE:
EXECUTIVE SUMMARY
Tax-exempt entities such as schools, churches, municipals
and traditional 501c3 organizations have long been at the
forefront of the environmental charge, due largely to the cost
savings that can be realized by the efficient use and reuse of
our limited resources. Efforts such as recycling, energy efficiency, and carpooling have been used by such organizations
for years. Unfortunately, the purchase and installation of a
photovoltaic solar-energy system has been cost prohibitive
for tax-exempt entities because they cannot take advantage
of tax incentives offered by the federal government.
In 2011, Brightergy developed a solar-lease product for taxexempt organizations that removed not only the traditional
barrier to entry (upfront cost), but also provided measurable
financial savings and clean power. How and why we did it are
the topics of this white paper.
How to Provide Solar Power to Tax-Exempt Entities in Missouri; Version 3.0; February 1, 2013
www.Brightergy.com
2
EXECUTIVE SUMMARY CONT’D
“In short, to utilize federal tax credits on an asset leased to a tax-exempt entity in Missouri and be in compliance with all applicable regulations, three conditions must be met:
1. The lease must be an operating lease (also called a “true lease”) and not disguised as a Power Purchase
Agreement (PPA), deemed purchase or service contract, according to the IRS 1.
2. A developer can elect to monetize only one federal incentive in their operating lease to a tax-exempt
entity: The 1603 Treasury Grant.2
3. The lease must use equipment that was safe harbored in 2011 under the American Recovery and
Reinvestment Act Section 1603 Treasury Grant Program 3.
The Department of Energy (DOE) best summarizes the situation in its guidelines 4:
“Under federal tax law, if a developer of renewable energy equipment leases the equipment to
a governmental entity or a tax-exempt organization (considered “Ineligible Entities”), the developer
may not claim the ITC because the property is considered “tax-exempt use property.” In addition,
accelerated depreciation cannot be claimed on the property in such a case. However, under the 1603
Grant program, if an energy property owner is otherwise eligible, leasing the property to an Ineligible
Entity will not impact the owner’s eligibility for the ITC as long as the lease is considered a “true lease”
under IRS guidelines (the IRS has issued a list of factors to consider in that evaluation).”
IRS “True Lease” Guidelines: See Rev. Proc. 2001-28, 2001-1 C.B. 1156:
http://www1.eere.energy.gov/wip/solutioncenter/pdfs/ch04_fed_tax_issues.pdf
1
U.S. Department of Energy; Energy Efficiency & Renewable Energy; Clean Energy Finance Guide:
http://www4.eere.energy.gov/wip/solutioncenter/finance_guide/content/summary_federal_renewable_energy_tax_incentives
2
Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 Terms
and Conditions: http://www.treasury.gov/initiatives/recovery/Documents/energy-terms-and-conditions.pdf
3
U.S. Department of Energy – Commercial Tax Benefits:
http://www4.eere.energy.gov/wip/solutioncenter/finance_guide/content/commercial_tax_benefits
4
www.Brightergy.com 3
AN OVERLOOKED MARKET
Tax-exempt (not-for-profit) entities have long been at the forefront of the environmental movement, as evidenced by the frequent sight of recycling bins in school and church parking lots. The success of these efforts
are driven by two simple facts: 1) not-for-profits are always looking for ways to reduce costs, and 2) care for
the planet through the efficient use of limited resources often aligns with their organizational missions.
Solar power, a free and clean fuel, has the potential to satisfy both drivers – reducing costs for electricity
and eliminating the harmful emissions associated with the traditional generation of power via the burning
of fossil fuels. Stakeholders also favor solar power. Nine out of ten American voters believe it is important
for the U.S. to develop and use solar power 5. To support this developing industry and its environmental
and job benefits, the Federal Government provides tax incentives, and many states provide rebates for the
installation of solar systems6.
Because not-for-profits are tax-exempt, the very organizations that most support the movement to clean
power cannot take advantage of all the incentives available. Missouri tax-exempt organizations – churches,
schools and municipalities — in the KCP&L and Ameren-Missouri service areas can qualify for the utility
rebate when they install a solar system. However, taking advantage of the federal tax incentive is simply
not possible.
OFFERING SOLAR LEASES TO TAX-EXEMPT ENTITIES IN MISSOURI
While solar leasing has been available in other parts of the United States for years, Brightergy was the first
company to offer a regulatory viable solar lease for tax-exempt entities in Missouri. We created it to remove
the primary barrier to entry for this market segment – upfront capital cost – and we did it while following all
state and federal regulations. Our BrighterLease™ is a true operating lease. Brightergy owns the solar system
and leases it to the tax-exempt entity for 20 years with no money down and a monthly fixed lease payment
that will be less than the cost the entity would have paid the utility company for the generated electricity.
UNDERSTANDING THE REGULATIONS
Although Brightergy’s lease program makes it simple for tax-exempt entities to go solar, it’s important to
understand the complexity behind it. There are restrictions imposed by both the IRS and the U.S. Treasury
5
6
Hart Research, National Solar Survey: http://www.seia.org/research-resources/national-solar-survey
Database of State Incentives for Renewables & Efficiency:
http://dsireusa.org/incentives/index.cfm?state=us&re=1&EE=1
Department when a tax-exempt entity considers entering into a lease with a third party that is utilizing
federal incentives. Understanding these restrictions is key to knowing whether or not a tax-exempt entity is
entering into a regulatory viable lease.
FINANCING, INCENTIVES AND EQUIPMENT
There are three components to consider when a solar developer is attempting to contract with a taxexempt entity:
1. The financing instrument.
2. The method by which the developer will monetize the federal incentives.
3. The equipment used in the solar system.
For a solar developer to claim the federal incentives available, they must monetize them as part of their financing package, so the incentive and financing go hand-in-hand. There are two ways they can accomplish this:
1. Claim the Investment Tax Credit (ITC), which covers 30 percent of a project’s capital cost.
2. Or, elect to take a grant under Section 1603 of the IRS code for Specified Energy Property in lieu of the
ITC. This grant also covers 30 percent of the project’s cost.7
If the developer choses option one, they CANNOT offer a lease product to a tax-exempt entity. Federal regulations state that a solar developer cannot install a system for a tax-exempt organization, take the 30 percent
ITC, and then use that incentive as part of the lease structure (i.e. offering lower payments)8.
Rather, the developer would have to offer a Power Purchase Agreement (PPA) to the tax-exempt entity. In
this financing model, the developer owns and installs a solar system on the customer’s roof and then sells
the actual electricity the system generates to the customer (priced as cost per kWh of electricity). This
method is also known as a “service contract.” Again, the solar developer must not disguise the instrument
as an operating lease or a purchase.
Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 Terms
8 Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 Terms
7
This PPA-ITC, financing-incentive model is most common in other states. It is not used in Missouri because
utility companies have maintained only regulated utilities can sell power indiscriminately to Missouri customers9.
Therefore, a PPA or similar instrument creates exposure to unnecessary risk.
The Solar Energy Industry Association (SEIA) – the trade group for solar developers – published a tax
manual to specifically help solar developers and their customers understand this complex issue. It states:
“Equipment must be used in the United States to qualify for a commercial solar tax credit. In addition,
commercial solar tax credits cannot be claimed on equipment that is ‘used’ by someone who is not
subject to U.S. income taxes.”10
This is further referenced in subchapter A, section 1.48-1 (definition of section 38 property) of Treasury
Regulations, which states the following:
“Property leased by another person to an organization exempt from tax or leased by such an organization to another person is not section 38 property to either lessor or the lessee, and in either case the
lessor may not elect under 1.48-4 to treat the lessee of such property as having purchased such property for purposes of the credit allowed by section 38.” 11
THE ONLY REGULATORY VIABLE CHOICE IN MISSOURI
IRS and U.S. Treasury Department regulations state that a third party that wishes to monetize federal incentives through a solar lease to a tax-exempt organization must use an operating lease (also called a “true
lease”) 12; the developer can monetize only the 1603 Treasury Grant in their operating lease 13; and the lease
must use equipment that was safe harbored in 2011 under the American Recovery and Reinvestment Act
Section 1603 Treasury Grant Program 14. Let’s examine these components more closely.
4 -MO-PSC Websites: http://www.moga.mo.gov/statutes/C300-399/3860000020.HTM
http://www.moga.mo.gov/statutes/C300-399/3930000106.HTM
10 Reinvestment Act of 2009 Terms and Conditions:
http://www.treasury.gov/initiatives/recovery/Documents/energy-terms-and-conditions.pdf
11 U.S. Department of the Treasury; 1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits:
http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx
12 IRS “True Lease” Guidelines: See Rev. Proc. 2001-28, 2001-1 C.B. 1156:
http://www1.eere.energy.gov/wip/solutioncenter/pdfs/ch04_fed_tax_issues.pdf
13 U.S. Department of Energy; Energy Efficiency & Renewable Energy; Clean Energy Finance Guide:
http://www4.eere.energy.gov/wip/solutioncenter/finance_guide/content/summary_federal_renewable_energy_tax_incentives
14 Payments for Specified Energy Property in Lieu of Tax Credits under the American Recovery and Reinvestment Act of 2009 Terms
9
OPERATING LEASE
A lease is simply a contractual agreement between two parties – the lessee (the user) and the lessor (the
owner) – for an asset. There are generally two types of leases: an operating lease and a capital lease. The
difference between the two is in accounting. In an operating lease, the lessor transfers only the right to use
the property to the lessee. Since the lessee does not assume the risk of ownership, the lease expense is
treated as an operating expense in the income statement and the lease does not affect the balance sheet.
In a capital lease, the lessee assumes some of the risks of ownership and enjoys some of the benefits. Consequently, the lease, when signed, is recognized both as an asset and as a liability (for the lease payments)
on the balance sheet. The lessee gets to claim depreciation each year on the asset and also deducts the
interest expense component of the lease payment each year. In general, capital leases recognize expenses
sooner than equivalent operating leases.
THE 1603 TREASURY GRANT
In response to the dramatic decline in capital available for renewable energy projects during the recession,
the American Recovery and Reinvestment Act of 2009 (ARRA) included important modifications to the
Investment Tax Credit (ITC), including the creation of the Section 1603 Treasury Grant Program.
The program allowed solar and other renewable energy developers to receive a direct federal grant in lieu
of taking the ITC that they were otherwise entitled to receive. The goal of this modification was to simplify
financing for renewable energy projects and to provide access to capital during a time when project developers’ tax burdens were inadequate to capitalize on tax incentives and tax equity financing was both scarce
and expensive. The program has been very successful in achieving these goals.15
Section 1603 has very specific instructions on eligibility to claim this incentive in lieu of the ITC16. Specifically,
for solar leases installed after 2011, the third party must also meet the safe harbor requirements of the 1603
Grant Program.
Solar Energy Industries Association website:
http://www.seia.org/policy/finance-tax/1603-treasury-program/success-1603-treasury-program
15
www.Brightergy.com
7
SAFE HARBOR
One of the realities of large-scale wind and solar projects is that they take years to develop – as many as five
in some cases. Congress knew this when they wrote Section 1603 of the ARRA Bill. Because Congress did
not want large wind and solar developers to get caught flat-footed when the cash grant expired, they wrote in
a safe harbor provision to the law.
This provision states that if a developer incurred five percent or more of the total system cost and takes
physical title of the equipment by the end of 2011, the developer can install the renewable-energy system
later and still apply for and receive the cash grant from the Department of Treasury17. The safe harbor provision
allowed any solar developer to effectively grandfather themselves into the cash grant program. Safe harboring
equipment is the critical action required by a solar developer to offer tax-exempt entities in Missouri a true
solar operating lease, and thus one that is regulatory viable.
PUTTING IT ALL TOGETHER
Solar leasing to tax-exempt entities in Missouri is complex. We hope this paper has made the issues more
understandable and helps protect a tax-exempt entity from entering into the wrong kind of solar contract
with a solar developer. To summarize, the requirements for solar leases to tax-exempt entities in Missouri are
as follows:
1. A tax-exempt entity CANNOT use the federal 30 percent Investment Tax Credit (ITC) or Depreciation.
2. A developer CANNOT use the 30 percent Investment Tax Credit (ITC) or Depreciation when structuring
a lease to a tax-exempt entity.
3. A developer CAN use the 1603 Treasury Grant in lieu of the Investment Tax Credit (ITC).
4. In order to use the 1603 Treasury Grant, a developer MUST have met the requirements set forth for
safe harbor: The equipment MUST have been purchased in 2011, and the developer MUST have taken
title to the equipment in 2011.
5. If the developer has met the requirements of #3 and #4 above the lease must be a “true” lease – an
operating lease.
www.Brightergy.com
8
THE BRIGHTERLEASE™
Brightergy has created a leasing program that is compliant with all Missouri, U.S. Treasury Department
and IRS regulations. To assist us in our efforts, Brightergy retained preeminent renewable energy law firm
Chadbourne & Parke LLP and accounting firm Novagradac to help structure the BrighterLease™ program.
The BrighterLease™ program allows tax-exempt entities to implement solar energy in a simple and fiscally
responsible manner. The program provides a 23-25 kilowatt solar array per metered utility account. As the
owner of the system, Brightergy receives the utility rebate and applies for and receives the U.S. Treasury
grant. The balance of the cost of the system is embedded into the client lease payment across a 20-year
term. Each single system installation will save the tax-exempt organization money from year one.
ENERGY EDUCATION FOR SCHOOLS
The installation of solar panels creates a unique opportunity for hands-on learning about energy and the
environment. Brightergy offers Brightergy Schools Going Solar™, a program that consists of professional
development workshops, classroom lessons, and a service-learning project, all correlated to Missouri State
Standards.
The program targets a school’s existing math and/or science curriculum to provide additional supplemental
material and instruction about energy forms and sources. Special emphasis is placed on photovoltaic technology as the students utilize their own school building as a learning lab and their school’s solar array as a
hands-on visual tool for research.
BUILD A REPUTATION FOR DOING GOOD
Brightergy realizes the special mission of not-for-profits to do well in their communities and the world around
them. We help our tax-exempt clients tell their solar story through marketing, public relations and social
media, amplifying your message out to your stakeholders.
Several tax-exempt organizations – including the Parkway School District, Kirkwood School District and
Lutheran Senior Services in St. Louis, and the City of Kansas City, Missouri – have made the move to clean
power by enrolling in the BrighterLease™ program. The combination of clean energy with cost savings and
mission-centric action makes solar energy generated by a BrighterLease™ system a simple and smart
move, no matter how much energy an organization consumes. The BrighterLease™ has quickly become
the standard for implementing solar energy in the Missouri tax-exempt market.

How to Provide Solar Power to Tax-Exempt Entitites in Missouri

Transcription

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