How Tax Credit Financing is Done

Jeffrey Lesk shares the basics of how tax credit financing is done to set the stage for the coming changes with the Inflation Reduction Act. Jeffrey joined HeatSpring’s Getting Solar for Nonprofits, Governments, and Other Non-Taxpayers to share the knowledge he’s gained in his 40 year legal career with the HeatSpring community. Recently retired,  Jeffrey co-manages New Partners Community Solar, which he also co-founded. New Partners develops and operates solar arrays throughout the District of Columbia. Their organization is committed to Solar for All, directing all of the economic benefits of their energy production to low-income residents. Tune into the video or read the transcript below. 

One thing I want you all to recognize as you see these slides, the first slide is going to be a structure that has nothing to do with nonprofits.

It’s just how tax credit financing is done by for-profits or by nonprofits like us and Corey’s organization [Solar United Neighbors] also, who uses structures that actually work even in the current tax regimes. 

It’s a very simple calculation. 

You have a total development cost of a half a million dollars on a project in D.C. somewhere in the range of 150 kW program – more or less – depending on some of the particulars of the financing.

In tax rate finance, you always start with the concept of the basis of the cost. But there are invariably costs – words to the wise – that you’re going to have to back out of those costs before you garner tax credits on the balance.  In this case, certain building components that really aren’t part of the structure, transmission equipment, although that might change since interconnection costs are in includible for the investment tax credits. 

You come up with the net here of $475,000. The current rate through – it was 26% until this new Inflation Reduction Act. It’s now 30% of those qualified expenditures that you get in a tax credit –  $142,500.

Really important, a tax credit doesn’t mean that that’s money in your pocket per se, right? Unless you are using the tax credit yourself as a dollar for dollar reduction against your tax liability, you’ve got to get someone to pay you for those tax credits. They may pay you more or less for those credits depending on what benefit they get. And what benefit they get depends on how much they put in, when they put it in, and what other benefits may come along, like accelerated depreciation for a for-profit sponsored program. 

In this case, this is about the market, by the way, $1.05 for tax credit. So it’s actually more than the dollar for dollar credit, because the renewable energy tax credit is earned to anyone who is in the chain of ownership on the date that the project is placed in service. So that’s basically year one. Other tax credits are payable over 5 years or 15 years, but you’re getting a big benefit right up front. And so that’s a valuable credit. 

This is just the basic structure, but the world has changed in the last month or so. 

Want to learn more about how the world of renewable energy has changed since the Inflation Reduction Act, particularly for non-taxpaying entities? Enroll in HeatSpring’s free Getting Solar for Nonprofits, Governments, and Other Non-Taxpayers course.