Author: Alexis Long

Beginning in January 2023, U.S. taxpayers have the green light to leverage many of the tax benefits of the Inflation Reduction Act of 2022 (IRA), which was enacted in August 2022. One of the IRA’s more impactful features — the ability to transfer renewable energy tax credits — is expected to spur clean energy investment in the United States. It is also expected to provide significant tax savings for U.S. taxpayers participating in the new market-like system.

This article provides an introduction to renewable energy tax credits and highlights several key factors that buyers and sellers of these credits should consider. Because of the complexity of this emerging area, taxpayers should consult with their tax advisors before engaging in any related transactions.

Renewable Energy Tax Credits: How Did We Get Here?

Prior to the enactment of the IRA, federal renewable energy tax credit utilization was limited because the sale or transfer of such credits was prohibited. In most cases, developers of large-scale renewable energy projects did not have sufficient tax liability in the short term to utilize federal renewable energy tax credits. As a result, tax equity partnerships became the primary method to extract value from the tax credits generated by these projects.

In tax equity partnerships, a partner with sufficient tax liability would contribute capital to a project and be allocated most of the tax benefits for a certain period. These transactions are complex and often involve a significant amount of legal, advisory and accounting expertise. Tax equity financing remains a valuable tool for project finance, but the new credit monetization options in the IRA provide developers and business owners with additional possibilities.

With the passage of the IRA, certain renewable energy tax credits can now be transferred (sold) by those generating eligible credits to any qualified buyer seeking to purchase tax credits. Through credit transfers, taxpayers have the option to sell credits in exchange for cash as part of their overall renewable energy goals. For certain credits, such as energy storage and solar credits under Internal Revenue Code Section 48, credit transfers in exchange for cash also present an opportunity to simplify project structuring.

The IRA created two new monetization options for certain tax credits: direct pay for tax-exempt entities and credit transfers for traditional taxable entities. Direct pay represents a 100% cash refund in lieu of tax credits. Alternatively, credit transfers create a market-like system intended to bring credit generators and credit purchasers together.

Under the market-like approach, some credit transfer requirements must be kept in mind:

• Credits must be exchanged for cash with an unrelated party
• Cash consideration received by the seller is treated as tax-exempt income
• Cash consideration paid by the buyer is nondeductible
• Credits are limited to a single transfer; a transferee may not resell

Focus Areas for Buyers and Sellers of Renewable Energy Tax Credits

Considerations for Buyers

For credit buyers, the IRA’s credit transfer provisions create an opportunity to purchase renewable tax credits at a discount. For example, at a market price of $0.92 per $1.00 of credit, a taxpayer could purchase $100 million of tax credits for $92 million — and therefore save $8 million, assuming the credits were immediately used to offset taxes. Meanwhile, the sale proceeds improve the economics of clean energy development, potentially supporting the taxpayer’s environmental goals.

Buyers should consult with their tax advisors and perform a due diligence review to confirm that the underlying merits of the credits meet their advertised value. A buyer that purchases what it believes is a 30% investment tax credit, for example, should ensure that the prevailing wage and apprenticeship requirements are satisfied. Otherwise, the buyer risks finding out that the purchased credit is worth less than expected.

Buyers also must be cognizant of who will take on the risk of credit recapture or disallowance if the credit does not meet the necessary requirements. As the direct transfer market develops, buyers may seek indemnity clauses or tax credit insurance as part of the credit transfer agreement.

Considerations for Sellers

Project owners without significant tax liability must decide whether to monetize credits under the new direct transfer rules or use a traditional tax equity structure. Businesses must weigh both options to determine the best path forward for the business and the project.

While the credit transfer market is still developing, projects that provide thorough documentation to substantiate the advertised credit value may earn higher rates from buyers.

Price Discovery

There are multiple variables that buyers and sellers will want to consider in determining the appropriate price of a transferred credit. These factors include:

• The credit type and the underlying technology represented
• The value of the credit being transferred
• The possible inclusion of tax credit indemnity or tax credit insurance
• The project’s location

Transfer Process

For those in the market seeking to sell or purchase credits, early conversations with a trusted tax advisor and legal counsel are beneficial to ensure possible concerns have been addressed.

Before a transfer, sellers must make an irrevocable one-time tax election in the year the credit is generated. Elections must be made by the extended due date of the applicable tax return. It is important to note that the election occurs at the entity level. With the election at the entity level, partnerships or S Corporations must be cognizant of their shareholders’ tax position in deciding whether credits should be sold.

As an added benefit to buyers, any unused credits may be carried back three years or forward 22 years.

Exhibit 1: Clean Energy Tax Credits in the IRA

What’s Next for Renewable Energy Tax Credits?

We expect many taxpayers and clean energy developers to benefit from the IRA provisions enabling the transfer of renewable energy tax credits. In conjunction with the projected increase in clean energy investment in the U.S., a robust credit market will likely develop as well. Despite these advances, it is important to remember that these tax credits are complex and require thorough due diligence and appropriate professional counsel.

 

Written  by Gabe Rubio, Courtney Sandifer and Drew Norris. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com

 

Arkansas

Beginning at 12:01 a.m. on Saturday, August 5, 2023, and ending at 11:59 p.m. on Sunday August 6, 2023, the state of Arkansas will hold its sales tax holiday allowing shoppers the opportunity to purchase certain electronic devices, school supplies, school art supplies, school instructional materials, and clothing free of state and local sales or use tax. 

Click the link for more information. 

Mississippi

Mississippi’s 2023 Sales Tax Holiday begins at 12:01 a.m. Friday, July 28, and ends at 12:00 Midnight Saturday, July 29.   No sales tax on the sale of clothing, footwear, or school supplies if the sales price of a single item is less than $100. 

Follow the link for more details on Mississippi’s Sales Tax Holiday 

Tennessee

Tennessee’s traditional sales tax holiday on clothing, school supplies and computers is the last full weekend in July.  For 2023, it begins at 12:01 a.m. on Friday, July 28, 2023, and ends at 11:59 p.m. on Sunday, July 30, 2023.

For 2023, Tennessee’s General Assembly has approved a three-month grocery tax holiday on food & food ingredients which begins at 12:01 a.m. on Tuesday, August 1, 2023, and ends at 11:59 p.m. on Tuesday, October 31, 2023. 

Follow the link for the full details of Tennessee’s 2023 sales tax holiday.

Kentucky

*Sales tax holiday does not apply to the state of Kentucky. 

For questions on sales tax holiday information in the states that ATA resides in, reach out to your local ATA representative. 

On May 11, Tennessee enacted H.B. 323, the Tennessee Works Tax Act of 2023, which makes changes to franchise and excise taxes, sales and use taxes, and the business tax. This alert summarizes the most significant provisions and includes links to several notices issued by the Tennessee Department of Revenue (Department) explaining the legislative changes.

Franchise and Excise Taxes

The Works Tax Act makes numerous changes to Tennessee’s franchise and excise taxes that are imposed on corporations, including S corporations, limited partnerships, and limited liability companies taxed as partnerships for federal purposes. The most important changes involve:

• Perhaps the most significant change enacted by H.B. 323 is the phased-in adoption of a standard single sales factor (SSF) apportionment formula. Most Tennessee taxpayers that are not financial institutions apportion net earnings or loss for excise tax purposes and net worth for franchise tax purposes using a traditional ratio based on three factors (property, payroll, and sales) with a triple-weighted sales factor. The Works Tax Act adopts SSF, which will be phased in over three years by increasing the weighting of the sales factor. For tax years ending on or after December 31, 2023, the sales factor is weighted five times; for tax years ending on or after December 31, 2024, the sales factor is weighted 11 times; and for tax years ending on or after December 31, 2025, the SSF will be fully phased in.

The legislation also repeals the SSF apportionment election available to manufacturers effective for tax years ending on or after December 31, 2025. It provides an annual elective apportionment formula using three factors with triple-weighted sales for tax years ending on or after December 31, 2023. The election may be made only if the three-factor formula results in a higher apportionment ratio for the taxpayer and the taxpayer has net earnings rather than a net loss.

• Federal Bonus Depreciation. For assets purchased on or after January 1, 2023, Tennessee will now conform to the federal bonus depreciation provisions in the Tax Cuts and Jobs Act of 2017.
• Standard Excise Tax Deduction. For tax years ending on or after December 31, 2024, H.B. 323 creates a $50,000 standard deduction to reduce net earnings, but not below zero, when calculating the Tennessee excise tax.
• Franchise Tax Base Property Measure. For tax years ending on or after December 31, 2024, H.B. 323 creates an exclusion of up to $500,000 of a taxpayer’s aggregate property value from the real and tangible property measure of the franchise tax base. The $500,000 exclusion does not apply to the net worth tax base measure.
• Tax Credit Carryforward Periods. Tennessee offers various statutory tax credits to new and expanding businesses in some industries (manufacturing, call centers, research and development, etc.) if the business creates new jobs and/or purchases qualifying assets used in the state. The Works Tax Act extends the carryforward period for excess credits from 15 years to 25 years.
• Paid Family and Medical Leave Credit. The bill enacts a new tax credit based on the federal paid family and medical leave credit. Taxpayers may claim the credit for tax years ending on or after December 31, 2023, but before December 31, 2025.

Sales and Use Taxes

For businesses, H.B. 323 makes several changes to Tennessee’s sales and use tax laws. The following take effect July 1, 2024:

• Taxation of the repair of tangible personal property (TPP) or computer software, installing TPP that remains TPP after installation, and installing computer software when (1) the repair or installation occurs outside Tennessee and (2) the seller delivers the serviced TPP or computer software to the purchaser or purchaser’s designee in Tennessee or to a carrier for delivery in Tennessee for use or consumption in the state.
• Repeal of the exemption for magazines and books that are distributed and sold to consumers by U.S. mail or common carrier.
• Repeal of the exemption on the sale or use of direct mail advertising materials.
• Clarification of rules for sourcing some taxable retail products, including sales of TPP and digital goods and services.

Business Tax

The Tennessee business tax is a gross receipts tax on sales of TPP and most services delivered to customers in Tennessee. H.B. 323 makes several changes to benefit smaller businesses and some industries, including:

• Increased Filing Threshold. For tax years ending on or after December 31, 2023, the filing threshold for taxable sales in any individual county or incorporated municipality is increased from $10,000 to $100,000.
• Manufacturing Exemption. Under current Department policy, manufacturers are exempt from the business tax only if sales are made from the same facility where manufacturing occurs. Effective immediately, the location requirement is removed. The Department now considers the cumulative activity in the state to determine whether a taxpayer qualifies for the manufacturing exemption. Further, the exemption is expanded to include sales made from a storage or warehouse facility located within a 10-mile radius of the manufacturing location.

 

Insight

• The Works Tax Act’s phased-in adoption of SSF follows a trend among more than 30 states to apportion income using the SSF method for corporate income tax purposes.
• Taxpayers with material tax credits created over the past 15 years should consider the impact of the extended carryforward period for credit use in conjunction with Tennessee’s adoption of SSF apportionment. Depending on the facts and circumstances, the law changes might also affect balance sheet items (e.g., deferred tax assets). The annual three-factor apportionment formula election should also be evaluated for taxpayers in this position.
• The increase in the Tennessee business tax threshold should benefit out-of-state taxpayers, many of whom are often surprised that such a tax exists in Tennessee. The Works Tax Act’s clarification of the manufacturing exemption should benefit in-state manufacturers.

 

Written  by Scott Smith, Kristen Weeks and Michael Person. Copyright © 2023 BDO USA, LLP. All rights reserved. www.bdo.com

 

The IRS recently released its audit statistics for the 2022 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them. 

Recent statistics 

Overall, just 0.49% of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5% of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022. However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones. 

Be ready 

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns. Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why. Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors. The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return. 

Tax return complexity 

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income. In FY 2022, most examinations (78.6%) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices. 

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented. 

Get professional help 

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping. © 2023

June brides (and grooms) take note: Marriage alters your tax status and adds a few more to-dos to what’s probably a long list.

If one or both of you change your names, notify the Social Security Administration because their records must match those on your tax returns. You’ll be able to choose whether to file your income tax return jointly or separately each year. Joint filing typically is more beneficial, but not always.

If you both work, you may be pushed into a higher tax bracket or become subject to the 0.9% additional Medicare tax. So look into whether you should increase your withholding by submitting new W-4 forms to your employers. Contact us for help.

Two years ago, the National Collegiate Athletic Association adopted the interim name, image, and likeness (NIL) Policy. It enables student-athletes to personally be compensated for their sports ability and fame. 

In a new legal Advice Memorandum (2023-004), the IRS addressed whether developing NIL opportunities for college student-athletes serves a tax-exempt purpose.

NIL “collectives” have been set up by boosters and fans of college athletic programs to pay their schools’ athletes. The IRS guidance states that in many cases, such groups are “serving the private interests” of the students and are “operating for a substantial nonexempt purpose.”

Contact us if you have any questions about tax planning.

Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan. 

While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement. 

 

Avoiding conflicts 

A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced, or deciding to leave the company. If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it. 

A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value. By facilitating the orderly transition of a deceased, disabled, or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer. This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention. 

 

Funding the agreement 

There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares. However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. 

There are two main types of buy-sells funded by life insurance: 

1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest. 

2. Entity-purchase agreements. In this case, the business buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company. A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies. 

 

Getting expert guidance 

Creating, administering, and executing a buy-sell agreement calls for expert assistance. ATA Capital and ATA Employment Solutions can help you identify, gather and organize the relevant financial information involved.

Contact us to get started.  © 2023

Tax relief may be available for student loan debtors, but only if they meet income requirements.

Individuals with qualified student loans can deduct on their federal income tax return up to $2,500 of interest annually if their modified adjusted gross income is $75,000 or less ($155,000 for married couples filing jointly). If they earn more, the deduction gradually phases out at $90,000 ($185,000 for married filing jointly).

Eligible loans are incurred to pay qualified education expenses. If debtors pay more than $600 in student loan interest in a calendar year, they should receive from their lenders Form 1098-E reporting the amount of interest.

Contact one of our experts with questions about possible tax relief.

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