Solar for Lawyers and Big Corporations
HOW TO KEEP NORMAL FOLKS FROM INVESTING IN NEW ENERGY
By Craig Severance
President Obama has promised to energize the renewable energy sector to more than double its power production in just the next 3 years. Despite the Federal government's ambitious goals for renewable energy, two Federal tax rules are now actually preventing willing investors from participating in renewable energy projects.
Financing for the "new energy economy" is stalled. My experiences in just the last few weeks illustrate the frustration on all fronts:
- "Solar for Lawyers". On March 3rd, I was on a panel at the Clean Energy Finance Forum in Glenwood Springs, CO. One of the major topics discussed was how local governments could finance solar projects on public buildings. By the end of the day, pretty much everyone was shaking their heads in frustration over the complicated legal arrangements (called Power Purchase Agreements) required when the power user is a non-profit or a government entity. A consulting firm said it had spent two full years working out how to do these arrangements. A regional bank that wants to help local governments move forward with solar projects said it was stymied by the complexity of the arrangements. Only a handful of law firms nationwide know how to structure these deals. There was even talk of using Stimulus funds to pay the legal fees!
- "Solar for Big Corporations". I have been approached by many local investors here in Western Colorado who are eager to finance renewable energy projects. (Yes, some folks are still making money in America.) As a CPA, however, I have had to tell them it is unlikely they can actually use any of the tax credits or tax losses that flow from these projects. Congress has effectively excluded individual and small business investors, by action of tax laws. Typically, only large, widely held corporations can use the renewable energy tax credits and tax losses from investing in these projects.
- Solar for Losers? From March 9-11, I attended the Going Green East conference in Boston, a forum where "greentech" companies present their technologies and business plans to a high-level audience that includes investment bankers, venture capitalists, and media. I heard over and over again the same phrase -- "Project financing is dead!" Many of the institutions (a handful of large investment banks) which had traditionally owned renewable energy projects no longer have the "tax appetite" to use the tax credits and depreciation deductions. This is a polite way of saying these large corporations are now losing money and they simply don't need tax breaks when they don't have profits.
This litany of frustration is complicating and stalling financing for renewable energy. It is largely due to two very little known provisions of the Federal tax rules:
- Tax Rule: No Solar Investment Tax Credit When You Rent Equipment to a NonProfit or Government. (Outcome: "Solar for Lawyers"). The Solar Investment Tax Credit is specifically allowed for a lessor who owns the solar equipment and leases it on an Operating Lease to a tax-paying end user, such as a homeowner or a business. This is a good way for many to take advantage of solar who can't finance the equipment themselves. However, when the entity leasing the equipment is a nonprofit or government, the tax laws specifically forbid the lessor from taking the Tax Credit. Why is this provision there - its almost as if Congress doesn't want nonprofits and local governments to be able to use solar? The tax lawyer "work-around": a Power Purchase Agreement (PPA): Instead of leasing the equipment to the nonprofit or government (a simple equipment lease which most local attorneys could easily draft) -- there is instead an arrangement put together between the local utility, the nonprofit or government, and the owner of the equipment for the equipment owner to sell kWh's to the nonprofit or government. This gets pretty complicated since the equipment owner is not really a utility company yet the PPA still has to make this happen. This complicated solution - costing thousands in specialized legal fees -seems like just a big waste of money when a simpler solution (e.g. equipment lease) could work if not for the special tax rule. Even if it wasn't a waste, if Congress does not remove the restriction, will these specialized lawyers be able to handle all the demand for new Power Purchase Agreements, if local governments and nonprofits nationwide all want to do solar?
- Tax Rule: Passive Loss Limitations -- Individual and Small Business Investors Can't Take Tax Credits or Losses Unless they Work (a lot!) on the Project. (Outcome: Solar for Big Corporations). This second rule is a much bigger deal because it keeps out a whole class of investors who want to invest directly in renewable energy projects -- individuals and small businesses. Most solar and wind projects are actually run by operating companies who hire the technicians etc. However these companies need investors to fund the solar or wind farm. The investors are different people than the ones running the project -- so the investors are not very actively involved. That's ok if the investor is a widely held C-Corporation, like Morgan Stanley, or GE, etc. If that big corporation invests it doesn't have to prove its owners are actively involved. However, if I invest personally, or my small business invests, and I don't actually work on the project (a lot! -- usually at least 500 hours per year), then it is deemed a "Passive Activity" by the tax laws and I can't use the Tax Credits or Tax Losses against other income on my tax return that is not "Passive". This is a great way to EXCLUDE indiividuals and small businesses from investing in renewable energy projects. DO WE WANT TO CONTINUE DOING THIS?
As a CPA I don't write the tax laws, I just help my clients to follow them. However, if Congress really wants to jump start the renewable energy sector, it might want to take a good look at how the two tax rules above are stopping renewable energy investments dead in their tracks. A special exemption from these two rules -- for renewable energy projects -- could help get Renewable Project Financing moving again.
(CPA's disclaimer: None of the above is specific tax advice. Always consult your own tax advisor about your specific situation before making any decisions or taking any actions.)
This article was originally posted on March 25, 2009.