Even in tough economic times, great opportunities exist, especially for governments and tax-exempt organizations interested in using of renewable energy. In fact, it is precisely these tough times that are making renewable energy the smart choice right now. This is especially true for cities and schools, where declining tax revenues and high operating costs are forcing cutbacks to balance budgets.
Because investments in renewable energy can often lower otherwise fixed operating costs, renewables are a wise solution – one where everyone wins, as long as you go about it the right way.
In general, renewable energy investments, like solar systems, have a substantial upfront cost. For most, this poses a challenge for tight budgets. As a result, clever city managers and school administrators are looking for solutions that solve the problem of meeting energy needs while managing and lowering costs.
A good solution exists and here’s how it works.
In general, renewable energy equipment, like solar panels, wind turbines, biomass, and geothermal heating and cooling systems, qualifies for large federal income tax benefits which cover up to 30 percent of the costs for such equipment – with resourceful structuring, the tax benefits can often times generate up to 40 percent of the equipment costs.
The problem for governments and tax-exempt organizations is that they don’t pay taxes and therefore when purchasing renewable energy equipment, these entities could end up paying more. Fortunately, if the government or school can arrange a proper public-private partnership, this is not true.
So how is this done? Simply by not owning the equipment – at least for the five-year period that is required by the U.S. tax code. If the government or tax-exempt entity allows a private partner to legally own the equipment, and simply signs a five-year energy service agreement, the tax benefits can be realized by the private partner and the school or government takes advantage of the lowered energy costs.
There are other partnerships that can be structured and an experienced renewable energy tax advisor can help sort through the tax code. For example, in some instances ownership by a so-called “blocker corporation” may allow the school or tax-exempt entity to hold partial ownership of the equipment. Unfortunately, this it isn’t a solution for governments (only for tax exempts) because of special federal tax rules that differ for governments.
So what can be done if neither ownership, lease, nor a blocker works? Focus on the tax law rather than just state law.
There is also a little known, and highly esoteric, federal income tax rule whereby if a taxpayer can establish ownership for federal income tax purposes, you can in essence ignore state law legal ownership for federal tax purposes. Therefore, if the IRS agrees that, based on all the facts and circumstances of the transaction between the public and private parties, the private party is the owner of the equipment, even if there is a bona fide state-law lease or legal title held by an exempt entity, then federal tax benefits may be realized by the private party. But again, I highly recommend that you seek tax counsel of the utmost competency, and cooperative tax-exempt partners in order to take advantage of this type of “threading the needle” on tax code.
As I mentioned earlier, the simplest solution is for a private sector party to own the renewable energy equipment and sell the energy back to the government or tax-exempt entity through an energy services contract or a power purchase agreement (PPA). By selling energy under contract where the contract is not characterized as either ownership or a lease for federal tax purposes, the federal (and maybe state) tax benefits stay with the private party. As long as such sales of energy are legal in your state, this is a powerful solution.