2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

COMMERCIAL SOLAR INCENTIVES

ACTIVE OR PASSIVE The above-mentioned tax benefits can be used to offset passive income by investors. Additionally, for taxpayers with five or fewer members, active participation can be achieved by spending 100 hours relating to the solar entity and its formation, including reviewing investment options, travel time to inspect the project, time spent with CPAs and attorneys on documentation, and time spent with the developer to satisfy the requirements. With active participation, the tax benefits can be used to offset ordinary income from an operating business. TAX EQUITY INVESTOR When a developer or contractor is constructing large commercial solar projects (>$1M) and does not have a large enough tax liability to utilize the credits and depreciation, a tax equity investor may be an option. Many tax-exempt entities use tax equity Investors to fund solar projects for churches, school districts, and local governments. These entities collaborate with a tax equity investor who has a large tax liability who can fully utilize the tax benefits. In the marketplace, we see four types of structures used in tax equity financing: X Sale-Leasebacks: The developer or sponsor sells the solar PV system to a tax equity investor who then leases the system back to the developer or sponsor. X Partnership Flips – The developer/sponsor forms a partnership, and the economic returns “flip” from the investor to the developer/sponsor after the investor makes use of the tax benefits and holding periods in order to avoid recapture. X Inverted Lease – The developer/sponsor leases the system to the investor, structuring the agreement in a way that allows the investor to use the tax benefits. Third Party Ownership (“TPO”) – Under a TPO Agreement, the sponsor will enter into a Purchase Power Agreement with the investor for usually 25 years. The investor will claim the tax credits and depreciation. The investor gets the cash flows from the sponsor from the sale of the electricity.

In addition to the bonus depreciation, the taxpayer is eligible to depreciate the 15% remaining basis using a 5-year MACRS life. In this example, the taxpayer would generate another $30,000 in depreciation deductions ($1,000,000 - $850,000 x 20% Yr 1 MACRS Depreciation Rate =$30,000). The taxpayer will continue to claim future depreciation deductions using the MACRS 5-year property percentages.

Example:

Solar PV System Cost

$1,000,000

Federal Tax Credit (30%) $(300,000) Tax-Effected Bonus Depreciation (37%) $(314,500) Tax-Effected MACRS Depreciation $(30,000) Tax-Effected State Depreciation (8%) $(16,000) TOTAL YEAR 1 TAX BENEFITS $660,500

USING TAX CREDITS AND DEPRECIATION

Any unused ITC can be carried back one tax year and carried forward for 20 years to offset future taxable income. Prior to the (CARES) Act, a taxpayer generating a loss from a flow-through entity was only entitled to deduct $500,000 in any one tax year ($250,000 for single filers.) However, under the recently enacted CARES Act legislation, the “loss netting” provisions under the TCJA have been removed, thus allowing the full bonus depreciation deductions to be claimed. Furthermore, if the bonus depreciation puts the taxpayer in an overall loss position, the taxpayer can carryback the losses five years or elect to carry the losses forward.