Cherrytree Group LLC Blog

Previous posts have discussed the differences between a tax deduction and a tax credit.  Transferability is the key distinction between the two.  While we all have deductions that we can take against our gross income, these deductions are personal to each individual.  

A tax credit is a direct credit against bottom line taxable income, and may be transferable to other taxpayers. There are restrictions to transferability based upon the type of tax credit, but in general, the portability of a tax credit has created a marketplace for the sale and transfer of many different types of tax credits. This is a very useful source of finance, equity, or reimbursement, especially in this economy.  

At The Cherrytree Group, we advise many clients on the use, transfer, and sale of their tax credits, but in developing a market for tax credits, it is important that clients consult with us prior to conducting a project, rather than in the latter stages of a transaction.  We can assist with developing the potential tax credit equity into a proposed budget or development pro-forma, which can lead to more control over financing costs.

Cherrytree has grown into a financial services company that has its own capital, credit lines and equity facilities, as well as a warehouse of tax credit buyers that include banks, insurance companies, Fortune 500 companies, multinational corporations, and high net-worth individuals.  We have the capacity and capability to purchase your tax credits for our own account, or broker a sale of the tax credit to one of our buyers.  For more information on this process, contact The Cherrytree Group.

... By Warren Kirshenbaum

In order to jump-start the economy and defuse some of the economic hardship caused by the recession, the American Recovery and Reinvestment Act of 2009 (the “Act”) attempted to infuse financial benefits and incentives into the economy. One of the sections of the Act benefits supporters and investors of renewable energy. The US is determined to be in the fore front of the renewable energy industry, and the government hopes that the industry continues to prosper despite the volatile economic times. Specifically, Section 1603 of the Act (the “grant” or “grants”) provides grants from the federal government to eligible “persons” (a legal construct including entities) who develop renewable energy systems during the recessionary period. The Federal government already provides tax credits that benefit the renewable energy industry that is credit that reduces dollar for dollar an eligible tax payer’s tax liability, if the taxpayer engaged in a qualifying renewable energy program. However, fearing that investors in renewable energy will not be able to successfully monetize tax credits, Section 1603 provides grants in lieu of the tax credits to interested investors. The purpose of Section 1603 is to temporarily fill the gap that was created by a lack of demand for tax credits from investors and simultaneously decrease American’s dependency on non-renewable energy sources while creating or retaining jobs.

The grant is for qualifying persons who install specified energy system on property during 2009 or 2010. The Treasury will provide grants up to 10% or 30% (depending on the energy system) of qualifying expenses. Persons eligible for the grant include government agencies, 501(c) organizations (non-profits), entities as qualified under IRC sec 54(j) paragraph 4, and partnerships or other pass-thru entities, or any direct or indirect partner of such entities.

Specified energy systems include large wind, closed-loop and open-loop biomass facilities, geothermal, landfill gas facility, trash facility, qualified hydropower facility, marine & hydrokinetic, solar, fuel cells, microturbines, combined heat & power, small wind, and geothermal heat pumps. Qualifying persons will continue to be eligible for the grant even when the renewable energy project is completed after 2010, for so long as the qualifying project began in 2009 or 2010. Beginning a qualifying project is defined as conducting physical work of significant nature either on or off site, costing at least 5% of the total cost of the project. Furthermore, the original use of the energy system must begin with an applicant. Accordingly, a person will not be eligible for the grant by simply purchasing an already installed renewable energy system. The applicant, however, may use pre-owned parts in the facility, but their costs may not exceed 20% of the total cost of the facility.

If less than 5% of the total cost is incurred during the 2009 or 2010 period or only preliminary work was completed during that time, the persons seeking the grant will be disqualified. Preliminary work includes planning or designing, securing financing, exploring, researching, clearing a site, test drilling, or excavation to change the contour of the land. On the other hand, excavation for the foundation or the pouring of the concrete pads of the foundation will be considered as the start of construction. The start of construction also includes the start of manufacturing components, even though the manufacturing is completed off-site.

The Act includes a powerful tool for businesses and individuals who support and are involved in the development of the renewable energy industry. The grant, although currently offered for a temporary period of time, offers an incentive to continue to build renewable energy systems in one’s community. For those who began constructing a renewable energy facility in 2009-2010 period, applying for the Section 1603 grant should be a priority. Although the application for the grant is complicated and often confusing, obtaining up to 30% of the eligible expenses offers a significant resource to assist in making your project a success. Cherrytree Group LLC and Kirshenbaum Law Offices can provide to you the expertise needed to decipher whether you qualify for the renewable energy grant and assist you in applying for and obtaining the grant as well as assist you in monetizing your tax credits.

Reprint of an article that I wrote for the LSPA (Licensed Site Professionals Association), published on April 20, 2010 - ... by Warren Kirshenbaum

This article is intended to serve as a follow-up to an article that appeared in the February 2010 Newsletter in which Ned Abelson, a prominent Boston environmental attorney, discussed the Brownfields Tax Credit (the “BTC”), and detailed how the BTC may be helpful for LSPs and their clients. However, further explanation of how the BTC may be fashioned to operate as an instrument of reimbursement for remediation expenses becomes necessary once a client concentrates on exploring its eligibility for the BTC. This month’s article will therefore focus on how your clients can obtain and sell the BTC, thereby obtaining a cash reimbursement for a large part of their remediation expenses.

The Statutes
As you are aware, Massachusetts General Laws Chapter 21E (“21E”) forces clients that own or operate a site that has environmental contamination to clean up the site, which is a risky, time consuming, and very expensive process. The law generally considers the current owner or operator as one of the parties responsible for the cleanup, but if the current owner or operator is an “eligible person,” as defined in Chapter 206 of the Acts of 1998 (the “Brownfields Act”), under certain conditions he or she can be absolved of liability, and, once the cleanup is completed M.G.L. Chapter 63 §38Q (i.e. the BTC) provides for a tax credit of 25% (for a site closed with an AUL or with ROS status) or 50% (for a site closed without the need for an AUL) of the eligible costs incurred to clean up the site. The owner can then monetize the credits by transfer to a buyer.

The Economic Environment
We are in an era in which more and more sites being considered by developers will be Brownfields sites, and in order to continue to foster economic growth, the creation of jobs, increase tax revenue by stimulating the production of housing, commercial, and retail spaces for our workforce and citizens, the Commonwealth has a decided interest in ensuring that Brownfields sites be remediated, and the BTC is an effective tool to achieve that goal. Since the 1986 Internal Revenue Code first created tax credits for low income housing, such tax based incentives have been utilized very effectively by government to outsource to the private sector a public function and allow the development of a competitive marketplace to fashion an economic solution to a societal need. Since 1986, government has created historic tax credits, new markets tax credits, renewable energy tax credits, motion picture tax credits, and the BTC.

Brownfields Tax Credits (“BTC”)
The BTC is available to certain taxpayers in Economically Distressed Areas who commence and diligently pursue a response action and maintain a permanent solution or remedy operation status in compliance with 21E and the Massachusetts Contingency Plan. The BTC Program acts as a direct or dollar-for-dollar credit against a taxpayer’s tax liability to the Commonwealth of Massachusetts. The tax credits may be used all at once in a given tax year, or the buyer can use as much as they can in the current year and then carry excess credits over to a subsequent tax year for a period of five (5) years. Because the tax credits are certificated (as opposed to other tax credits where a buyer needs to be part of the ownership entity), they are attractive to Buyers and may be transferred by application to the Massachusetts Department of Revenue (the “DOR”). Once issued, each certificate has a unique number and is associated with the certificate holder by tax identification number, so upon transfer the certificate is redeemed and a new certificate is reissued to the buyer. The buyer attaches the certificate to its tax return and claims the credit, or a part of it, for 5 years.

BTC Procedure
Many times, once a cleanup has been achieved and the LSP’s engagement is concluded, the client moves forward with their development of the site without consideration of the BTC. To effectively obtain and utilize the BTC, a client will have to engage one or more firms to help apply for and obtain the BTC, secure a buyer for the BTC, and execute the purchase transaction. The risk of the RAO being invalidated by DEP is effectively a risk of recapture of the tax credits by the Dept of Revenue. A buyer will usually require that the seller indemnify the Buyer from this in the purchase agreement. Depending on the dollars involved, bonding against recapture is an option, but usually the indemnification will be based upon the seller’s financial ability. In terms of the risk of recapture from this type of recurrence, it is actually very low.

The Buyers
The market for the BTC is growing and stabilizing, and, being a certificated tax credit, the BTC is attractive to an increasing pool of buyers due to its dollar-for-dollar credit against Massachusetts taxes, low risk of recapture by the DOR (as the environmental solution precedes the BTC’s issuance), and the statutory language that allows buyers to not be affiliated or connected with the project in any manner whatsoever.

Conclusion
Philosophically, the BTC is no different from other tax credits, but practically speaking, it is a “certificated” credit which makes transfer more efficient, the risk of recapture is low, and there are no ongoing compliance and accounting requirements, all of which are elements that are prevalent in, and serve to complicate, other types of tax credits. As LSPs working on remediating Brownfields sites, expanding your focus to advocate that your clients utilize and take advantage of the BTC amounts to the performance of an important industry service. You will be assisting in the development of an efficient marketplace, a market that can trade and monetize these credits, and you will be sustaining and assisting the development process which creates our employment opportunities, while allowing the field of environmental remediation to continue beyond LSP involvement, thereby raising the tide for all boats.