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Tax fairness is a term used to describe a passive participation in an asset or project where an investor receives a return based not only on the cash flows of the asset or project, but also on federal and state tax benefits (tax deductions and tax credits). Investors in tax stocks are typically large financial institutions that pay taxes such as banks, insurance companies, and utilities that use these investments to reduce future tax obligations. Tax justice is different from traditional corporate equity, where an investor makes an active investment and actively participates in corporate governance. A tax equity investor is passive and only participates in the management of the asset or project in cases of decline where something has gone wrong with the performance of the investment or with the asset or project. Tax fairness benefits stem from two broad categories: tax deductions and tax credits. The most common tax deductions are depreciation (which is common to all renewable energy tax equity financings) and interest deductions (available only for leveraged transactions at the asset or project level). Policies can also have an impact on the demand for tax justice. For example, if tax incentives for renewables expire, renewable energy investors may have fewer tax credits to monetize. A weaker demand for tax fairness could, from the perspective of investors in targeted activities, tend to reduce the cost of financing tax equity and reduce the total return on tax capital investors. Three categories of tax credits that currently or recently use this mechanism are presented in this report to explain the structure and function of tax justice agreements. These include the Low-Income Housing Tax Credit (LHTC); the New Markets Tax Credit (NJC); and two energy-related tax credits – the Renewable Energy Generation Tax Credit (TCO) and the Energy Investment Tax Credit (ITC). While these credits all use the tax fairness financing mechanism, no two credits do it the same. The economic reasons for subsidizing the activities carried out by these tax credits are not assessed.
Rather, this report focuses on explaining the structure and operation of tax justice agreements, analyzing the provision of federal financial assistance through this mechanism, and discussing various policy options related to tax credits based on tax fairness. There are two main types of credits that could be of interest to a tax equity investor: While the details of a tax fairness treaty vary by tax credit project and program, these transactions often have general common structural characteristics.6 Figure 1 provides a graphical summary of the structure and mechanisms of a tax equity investment type of project. The energy loan for solar energy represents 30% of the amount invested in solar projects whose construction begins before the end of the 2019 calendar year. In 2020, the borrowing rate for properties that begin construction in 2020 will be reduced to 26% before being lowered again to 22% in 2021. For properties whose construction begins after 2021, the credit is 10%.34 As an investment credit, the ITC is usually claimed in the year in which the property is put into service.35 The energy credit can be recovered, which means that a taxpayer must add all or part of the tax credit to their tax liability if a taxpayer sells the energy property or no longer uses the property for the purpose of: for which a tax credit has been granted. The collection period is five years.36 The return on tax investments is based on a combination of cash flows from the project and federal tax benefits (tax credits and tax deductions). For solar installations, these benefits include: Even if the corresponding tax credits were refundable, there could still be a role for investments in tax shares. Current tax credits based on tax fairness are granted over several years or when the investment in eligible real estate is completed and tax returns are filed. However, project developers usually need upfront capital to make their investments. Therefore, developers (both for-profit and not-for-profit) can still choose to rely on tax stock markets to monetize tax credits, even if they were refundable.
Alternatively, the repayment of tax credits could make it easier for projects to rely on debt financing. Lenders may be more willing to lend on favourable terms to a project that expects a repayable tax benefit in the future. Tax fairness provides a form of project financing using a combination of cash flows generated by the project and federal tax benefits. These benefits include both tax deductions and tax credits. For solar energy projects, the equity tax would result from advantages, including: Some tax capital structures involve a tax capital investor who buys a share of the promoter`s member shares. .