President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.
The Internal Revenue Service (IRS) has advised that the flip partnership guidelines under Rev. Proc. 2007-65, 2007-2 C.B. 967, do not apply to solar facilities or other projects claiming the Section 48 investment tax credit (ITC). The statement, made in in recently released CCA 201524024, was not surprising to practitioners in the solar arena as the revenue procedure expressly does not apply to ITC transactions.
The California Board of Equalization in December 2013 issued guidance to advise nonprofit real-estate owners of the property tax consequences of hosting on their tax exempt properties solar generating equipment owned by for-profit renewable energy developers. Hosting developers in this fashion has seen a burgeoning of distributed solar power, particularly in California. But nonprofits, such as churches and hospitals, have been reluctant to join with developers out of fear that their participation could jeopardize in whole or part their exemption from property taxes. That caution is justified: loss of all or part of a property tax exemption not only increases the cost of electricity due to the additional property tax burden, it might impact the nonprofit’s tax exempt bond financing by triggering a reporting covenant or even constituting an event of default (if the property were developed with tax exempt financing).
California nonprofit property can be exempt from property tax when used “exclusively” for its exempt purpose. “Exclusive” is not literally interpreted. For example, a hospital hosting a food service operation for staff, patients and their visitors would not cause the host space to lose its property tax exemption.
The Board’s Guidance — entitled Solar Energy Systems on Nonprofit Properties — clarifies the property tax consequences of three types of hosting Active Solar Energy Systems (ASES):
- If the developer sells all of the ASES-generated electricity directly to anyone other than the nonprofit (such as through the Los Angeles Department of Power and Water Feed-in Tariff), then the hosting portion of the nonprofit’s property loses its exemption;
- If the developer sells a portion of the ASES-generated power to the nonprofit and the balance to third parties, then the hosting portion of the nonprofit’s property loses its exemption; and
- If the nonprofit uses all of the ASES-generated power, then its exemption is unaffected.
The Guidance doesn’t resolve one potentially significant tax consideration. That is how California will deal with net metering where the nonprofit host consumes as much power as it needs, sends the excess onto the grid and receives a credit against it power bill for whatever balance. The logic of the Guidance would suggest that the nonprofit should retain the full property tax exemption in a net-metering scenario.