Solar Tax Update

Keith Martin
kmartin@chadbourne.com

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 The full House is expected to vote on an
economic stimulus bill on Wednesday. The
Senate Finance Committee will “mark up” the
Senate version of the bill tomorrow. One goal of
the bill is to make it easier for project developers
to convert the large tax subsidies on solar
projects into cash, at least during the next two
years when the tax equity market is expected to
remain impaired.

Republican opposition

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 There are two federal tax subsidies for solar: a
30% investment tax credit and depreciation that is
taken largely over five years. The stimulus bill
will extend a 50% “depreciation bonus” into 2009.
The two subsidies, plus the bonus, are worth 58¢
per dollar of capital cost of a typical project.

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 Almost no solar company can use the subsidies
directly. Most try to barter them in tax equity
transactions to raise capital to build their
projects. Only four of 18 institutions that put tax
equity into renewable energy projects in the last
two years appear still active. This is pushing up
yields.

Fannie Mae
bifurcated market

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 The House and Senate stimulus bills take
different approaches to reviving the market. The
House would let projects that are completed in
2009 and 2010 exchange tax credits for a cash
payment from the US Department of Energy for
30% of the project cost.

basis?
15 months
grandfather provision

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 The Senate is expected to vote instead to let all
“general business credits” from 2008 or 2009 tax
years be carried back up to five years, including
tax credits that were carried forward into 2008
and 2009. It would also let such credits be used
to reduce a company’s taxes to $0.

75%
one year

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 Both the House and Senate would also allow 2008
and 2009 losses to be carried back up to five
years. The Senate would also waive a 90% floor
on how far income can be reduced. Both bills
would bar banks and insurance companies that
received TARP funds from taking advantage of
the carryback.

two years

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 Both bills would get rid of a rule that investment
tax credits must be reduced to the extent a
project was financed with tax-exempt financing or
“subsidized energy financing.” Both bills create
several new types of “tax credit” bonds that may
open the door to some interesting new financing
structures.

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 For utilities that can use tax benefits, the Senate
bill is probably preferable. For solar companies
that cannot, the House bill is better, but may lead
to more competition for the few tax equity players
in the leasing end of the solar market.

ITC election

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The House bill would appropriate $8 billion to fund
the “credit subsidy costs” of more than $80
billion in federal loan guarantees for commercial
projects involving proven renewable technologies
and transmission technologies.

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 The solar market has seemed enamored lately
with inverted pass-through leases. The market
has already pushed the envelope on the structure
to a point where it presents too much tax risk.

master tenant

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 Most structuring questions lately have been about
prepaid service contracts and strategies for
municipal utilities interested in solar to benefit
indirectly from tax subsidies.

IOUs

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 Solar Tax Update

Keith Martin
kmartin@chadbourne.com

New York • Washington • Houston • Los Angeles • Mexico City • Beijing • Almaty • Moscow • St. Petersburg • Kiev • Warsaw • Dubai • London