Solar-Energy Companies Investigated Over Tax Incentives

October 31, 2016

The manner in which seven solar-energy companies — both foreign and domestically owned — use tax incentives paid out by the United States federal government has drawn the interest of lawmakers. Their investigation seeks to reveal the method by which these renewable energy companies, consisting of three solar-energy firms and four solar utility companies, determine the value of the tax credits received. Potentially, tax incentives measuring up to billions of dollars were improperly claimed.[1]

 

The investigation comes on the heels of the 2015 extension to the Production Tax Credit (“PTC”), which was implemented to ensure that renewable energy companies would be able to reap the benefits of federal tax credits.[2] Designed in 1992 to encourage renewable energy, the Obama administration extended the PTC through the year 2020 and thus far the law has been a huge success.[3] The PTC, along with the Investment Tax Credit (“ITC”), has incentivized an average of $15 billion of private investment in each of the past five years since their implementation. [4] At the time of the 2015 extension, the tax credits were projected to secure 73,000 American jobs and allow 8 million additional households to run on renewable energy before 2020.[5]

 

The seven solar companies targeted in the investigation were sent letters to determine whether federal funds were used properly.[6] The U.S. Treasury Department allows renewable energy firms to receive a 30% investment tax credit on the cost of acquiring a system and allows for either a dollar-for-dollar reduction in income taxes or a grant.[7] During the Obama administration’s two terms in the White House, approximately $25 billion in grants have been awarded to renewable energy entities.[8] It was the realization of the incredible rate at which these funds are distributed which caused Senators such as Orrin Hatch (R-Utah), the Chairman of the Senate Finance Committee, to conclude that the Treasury and the IRS lack adequate control over the tax incentive program and to initiate the investigation.[9]

 

The difficulty in determining whether federal funds are put to their intended use is due to the multiple transactions the money is put through once given to the receiving entity. Federal tax credits received by renewable energy developers are often transferred to large investors, who use the entirety of the credits, as renewable energy developers in the solar-energy sector frequently do not have enough income to build or install solar energy systems on their own.[10] Investors buy and install the systems and use the transferred tax credits to offset their total yearly income, which likely derives from ventures beyond renewable energy.

 

The transfer of funds also impedes attempts to determine their use because the fair market value of solar-energy systems is unclear and how the fair market is valued is largely unregulated. Although solar-energy firms claim that they follow IRS guidelines, independent appraisers currently make these determinations and criticism towards the tax incentives program has been directed at the Treasury Department and the IRS.[11] Not only is there no enforcing mechanism in place to help regulate the solar-energy market, there is no tracking system in place to ensure that grant recipients don’t apply for other tax incentives for the same investments.[12]

 

The Consumer Energy Alliance (CEA) released a report in September of 2016 that compiled different subsidies available for the production of solar energy in 15 states, including tax credits.[13] The report showed that 8 of the 15 states aggregated incentives, with the total exceeding the cost of installing a solar facility.[14] One state in the CEA’s study was found to accumulate government subsidies that totaled 119% of the cost for solar unit owners, meaning that those who installed panels earned a 19% profit.[15] Subsidies in Massachusetts and New Jersey exceeded 180% of solar facility costs, while California totaled 208%.[16]

 

Only since 2012 has the Treasury Department required solar-energy firms to provide information regarding their fair market calculations of solar energy systems.[17] If these valuations are incorrect, solar energy firms may be forced to reimburse investment institutions that bought the tax credits. These valuations are a particular focus of the current investigation. The director of public affairs at SolarCity, one of the firms under investigation, said “the answers to the questions posed are fairly straightforward, and we will provide them as requested.”[18] A spokeswoman from the Treasury Department declined to comment on the subject.[19]

 

Likely as a result of the circumstances leading to the investigations, together with the investigations themselves, tax credits for renewable energy are to be phased out slowly over the next 5 years. Under the PTC there is a 20% reduction in the tax credit if construction begins in 2017, 40% reduction if it begins in 2018, and 60% reduction if it begins in 2019.[20] Solar energy producers will be able to take advantage of the 30% Investment Tax Credit until the end of 2018, after which it will be reduced incrementally to 10% in 2022.[21]

 


 

[1] Brody Mullins, Ianthe Jeanne Dugan, and Richard Rubin, Lawmakers Probe Tax Incentives Received by Solar-Energy Firms, Wall Street J., (Sept. 15, 2016), http://www.wsj.com/articles/lawmakers-probe-tax-incentives-received-by-solar-energy-firms-1473967056.

[2] Erik Lange, U.S. Legislation Extends Tax Credits for Renewable Energy, Nat’l L. Rev., Jan. 13, 2016, http://www.natlawreview.com/article/us-legislation-extends-tax-credits-renewable-energy.

[3] See 26 U.S.C.A. §§ 38, 45 (2010).

[4]Federal Production Tax Credit for Wind Energy, Am. Wind Energy Assoc., http://awea.files.cms-plus.com/FileDownloads/pdfs/PTC%20Fact%20Sheet.pdf.

[5] U.S. wind industry leaders praise multi-year extension of tax credits, Am. Wind Energy Assoc. (Dec. 18, 2015), http://www.awea.org/MediaCenter/pressrelease.aspx?ItemNumber=8254.

[6] Christa Marshall, Senate, House panels probe solar firms, Governors’ Wind & Solar Energy Coalition (Sept. 16, 2016), http://www.governorswindenergycoalition.org/?p=18851.

[7] Id.

[8] Mullins, supra note 1.

[9] Id.

[10] Carl Surran, Lawmakers probe solar energy tax incentives, Seeking Alpha (Sept. 16, 2016), http://seekingalpha.com/news/3209325-lawmakers-probe-solar-energy-tax-incentives.

[11] Mullins, supra note 1.

[12] Id.

[13] Chris Millis, The Solar Industry Cashes In On Government Subsidies, The Daily Caller (Sept. 22, 2016), http://dailycaller.com/2016/09/22/the-solar-industry-cashes-in-on-government-subsidies/.

[14] Id.

[15] Id.

[16] Id.

[17] Mullins, supra note 1.

[18] Marshall, supra note 6.

[19] Mullins, supra note 1.

[20] Lange, supra note 1.

[21] Josh Brewer, Surprise U.S. Tax Credit Extension Ensures Renewable Energy Future, Mother Earth News (Jan. 12, 2016), http://www.motherearthnews.com/renewable-energy/energy-policy/investment-tax-credit-extension-zbwz1601zbre.aspx.

About

Evan Falon is a third-year law student at the University of Texas School of Law. Evan graduated with honors from Hamline University in St. Paul, Minnesota, where he was a four-year letter winner in men’s soccer. Evan will be working at Richards, Layton & Finger in Wilmington, Delaware after graduation.