Case Study: Clean Energy Tax Credits: How Recent Changes Impact Your Business and Clients

Transcription:

Eric Gordon (00:09):

All right, well, hey, thank you for joining us. We appreciate you guys being here today. My name's Eric Gordon. I'm with B10 Energy. Just real quick, at B10 we partner with accounting firms and tax professionals across the country to provide a safe source of renewable energy tax credits for their clients. And we'll get past B10 quick and move on to these gentlemen here. But we're excited to be here today. We have a great group of panelists. I want to introduce them just real quickly and we'll get in throughout this conversation too. We want to make sure this is an interactive session. We're going to be going over some recent legislative changes as they relate to the renewable energy tax credits, how that applies to you, to your clients. And so if you have questions, please raise your hand. We have some mics out there.



(00:59):

We want you to ask right away, not wait until the end and maybe forget about it. We don't have time to get to it. Please feel free to ask questions during the conversation. We look forward to the conversation. Want to first start off and with credentials like these, I've made sure to write 'em down. Start off with Ephraim Olson. Ephraim is a licensed tax attorney and the Managing Partner of Olson Partners Law. He has his law degree from Harvard and an LLM from NYU Ephraim focuses his practice on specialized areas of tax law, including renewable energy tax credits. So Ephraim, thanks for joining us today. Thanks, Eric. Yuri Kapilovich. Yuri is the Managing Partner of Kapilovich & Associates, and you may also know him as the fun CPA from his podcast and presence on LinkedIn. Hey, we got, there we go.



(01:46):

Let's see. So Yuri received his Bachelor of science in accounting from Rutgers University and a Master's of Science and Taxation from Philadelphia University, and he is a certified public accountant in Florida, New Jersey and Pennsylvania. So thank you Yuri for being here. And on the end here we have Michael Bergloff. So Michael's the Managing Partner of Securus Advisors and tax advisors for hundreds of high net worth clients and small to large size businesses nationwide. He's also the head of tax strategy for Moon Tax, a crypto reconciliation tax strategy firm. Michael's a licensed CPA in California, and he received his Bachelor's of Business administration from Boise State University. We were just talking, it's great to see another Bronco here. So we actually both graduated from Boise State. He got his master's of taxation from the University of Denver. So that's our esteemed panel here of professionals, but we want to kick it off and then, I'll start with you if that's okay. Yep. There's been some changes, some legislative changes, some things then some of these credits have been around for quite a while. But could you walk us through the legislative changes, a little bit of a history and background, what these credits are and what's changed here recently?



Ephraim Olson (02:59):

Sure. And this is not going to be new to all of you, but it might be new to some of you. So just we're on the same page. I'm going to start with background. So the tax credits come from at least the ones we're talking about, solar, wind, certain renewables as a percentage of the price of the project, 30% or 40% or sometimes less. 6% of the project price becomes a tax credit. Renewable energy tax credit that can then offset dollar for dollar tax as a credit. Those credits have been around for over a decade, section 48 credits, various parts of section 48.



(03:48):

Those credits have been around for over a decade. What's changed recently is as of the Inflation Reduction Act changed those credits from being credits that could be used by the person owning the system, putting the renewable energy system into service. Now those could be divorced and you could actually just sell, buy and sell them on the open market to someone wholly unrelated to the project. So the change has been not the creation of the credit that's the same. It's been around for a very long time. What's new has been that those credits that are created by the Renewable Energy Project can now be sold to someone wholly, wholly independent of the project. Okay,



Eric Gordon (04:29):

Awesome. And these credits, the section 48 fall under general business credits,



Ephraim Olson (04:34):

General business credits, so they're all the restrictions that come with that. You can only offset 75% of the tax for the year, stuff like that. There's other restrictions, but yeah, general business credits perfect.



Eric Gordon (04:47):

And the three year look back,



Ephraim Olson (04:50):

That is unique, right? I mean it's unique in general that you can buy and sell tax attributes, right? That's like a huge No-no, at the IRS, just generally, you can't buy and sell tax attributes. Thus all of the change of control, loss restrictions, all of the restrictions that come with sort of buying and selling tax attributes, this is very explicitly on the face of it flies against that. You can buy and sell a tax attribute and in addition to being able to buy it, so if you were the seller, you create a solar, a wind project, a battery project, you put it in service, you sell me the credits, a million dollars of credits, I can buy those credits and carry them back to offset my tax three years prior. So 24, you sell me 24 credits, I buy 24 credits, I can offset 23, 22, 21 tax liability with those credits, which is phenomenal for the taxpayer. It's unbelievable that they did that, but very unusual.



Eric Gordon (05:50):

Awesome. Thank you. Thank you. As a practicing CPA managing partner of your firm, how does this transferability apply to you and your clients? Why is this an important big deal?



Yuri Kapilovich (06:03):

Yeah, that's a great question and the important thing is we're all here for the Growth Firm Growth Conference. We're here to think about ways that we can help our clients and ourselves grow. And with the transferability coming in, the ability to sell, buy and sell these credits, it's a unique incentive and unique opportunity from a practicing standpoint to be able to then say to your clients, especially those that got C Corps out there that can utilize it with more of a slam dunk that you just say to them, Hey guys, we had a unique opportunity. This new inflation reduction act came out. All these opportunities are here now. And you can pitch that to them as another kind of strategy and make yourself look even better and obviously raise revenues and such.



Eric Gordon (06:48):

So you mentioned C Corps. Michael, can you walk us through real quick of who these apply to? Who are the best users of these transferable credits?



Michael Bergloff (06:56):

Yeah, probably the best users we're probably looking at C corporations and entities or individuals with a lot of passive streams of income. The regulations just came out I think, what, maybe a month or two months ago. The final regulations that, sorry, that kind of clarify that from the Internal Revenue Code, which I think as tax practitioners we're a bit disappointed of because internal Revenue code doesn't delineate between active and passive streams of income. But the IR seems pretty clear that this is going to only offset passive streams of income.



Eric Gordon (07:35):

So you have your passive income and then you mentioned the C-Corp.



Michael Bergloff (07:39):

Corp. Yeah. They don't delineate between active and passive streams of income.



Eric Gordon (07:44):

Perfect. Perfect. Ephraim, would you mind walking us through an example? Yeah, sure. Maybe real numbers just kind of get out there so we can picture in our minds how does this work for a taxpayer?



Ephraim Olson (07:55):

Yeah, happy to do that. And also happy just pay attention too, because this would be the pitch that I give to clients. This would be a pitch that I assume that you would give to clients pitch that a client would hear. So let's just assume that a client has a million dollars of tax liability. Forget the business, the restriction on sort of 75% of the income for purposes of this example. Just put that aside. They have a million dollars of tax liability that they can offset. How would say that they could go out today? So they know that they're going to have that for 24, let's say they could go out and buy credits for 90 cents on the dollars, right? Let's say, or 85 cents or 93 cents wherever they find the market, but something less than a dollar. They go pay $900,000 at the end of the year when they file their tax return, they're going to put a million dollars of credit on their return from the transfer, but they'll have paid $900,000 or $920,000 or $890,000, whatever the number is for those credits such that their savings are that the delta between what they paid and the taxes they offset and that delta is not taxable.



(09:11):

So in other words, it's not like they now have another a hundred thousand dollars of income that they have to recognize. They just get a hundred thousand dollars of tax savings after tax effectively non-taxable tax savings. And so the way I've seen it, I mean you could do that, take that same example. Pretend they had that same liability for three years in the past, so now they're talking about 4 million of liability they could offset, they could buy $4 million of credits at $900,000 per million. So the savings is now not a hundred thousand dollars, it's $400,000. They buy those credits, the transfer happens when they file their return, you file your return as the seller. My client files their return as the recipient. We do all the transfer documents, get the document. Now I carry it back on my previous three returns and my 24 return.



(10:08):

I now have set off offset $4 million liability with a savings of $400,000 or $300,000 or $200,000 or $600,000, whatever. The price of those credits was powerful, but it's real, right? It's not nothing. And then on a go forward, just so you know what I've seen clients do, I've seen them do that. I've seen them buy liabilities to offset 24. I've seen them buy credits to carry back. Those make a lot of sense. What I've seen more of I think is people taking their quarterly tax payments. So I'm going to be paying the IRS 250,000 of my million dollars. Instead of doing that, I'm going to spend that $250,000 and I'm going to buy tax credits so that when I get to the end of the year, I can offset that tax liability and instead of having that money sit with the IRS making no interest, I can buy credits and then save the 10% or 15% or 8% effectively getting a return on my money after tax that I wouldn't get with the quarterlies. Even though I already have the liquidity, I'm already paying the money. It's just I'm diverting it to tax credits rather than to the IRS quarterlies because I have savings there and I don't with the IRS. So that's what I've actually seen happen.



Eric Gordon (11:26):

Any questions on that before we



Audience Member 1 (11:29):

Are the sellers, generally individuals or commercial and what you're seeing?



Ephraim Olson (11:37):

That's a bit of a tough question to answer and I'll tell you why this is new, right? It started last year and like Michael said, the regs didn't get finalized until three weeks ago, so we're still pretty fresh. This is all brand new. The credits that transferred last year, what I saw, it was all big banks and it was all from huge commercial projects. So it was like 12 billion of credit transfer. It's a huge number, but it all went to huge C corporations from massive wind and solar projects, billion dollar, 800 million solar projects. What I'm seeing is that what I anticipate is that the market is going to open up for smaller commercial sellers, Eric B10 Energy. They do. They're not multi-billion dollar projects or smaller projects. I anticipate that that's going to fragment more and more so that we have smaller buyers and smaller sellers. The first tranche is the sort of big fish that have moved through. Does that answer the question? Yes, I hope. My hope is that we as a group that not just us but sort of the community, that we can have someone that has 50,000 or $500,000 of liability by credits and they don't have to have 500 million because if it's only 500 million, then it doesn't help the people that I work with and that probably many of us work with.



Eric Gordon (13:08):

Thank you. And maybe real quick, how many people in this room work with C corporations of any size or individuals with passive income and pass their entities? Okay. Okay, so a good amount, good amount.



Michael Bergloff (13:22):

One quick comment, Eric, if you don't mind. Just kind of following up with Ephraim and in the audience is as CPAs and tax practitioners, we look at risk versus reward. And so when I kind of looked at energy credits, there is some risk here, right? There's potential recapture. So how the rules read is that the buyer takes the shoes of the seller. So if let's say there's a new project or the project gets disposed of within five years, there's potential recapture. The second thing that I looked at is this is new. Eric E from the regulations were just finalized. Has there been any case law on this? Well, not really just because of regulations have just been finalized. With that being said, Ephraim any thoughts on how to mitigate risk from a tax attorney perspective?



Ephraim Olson (14:11):

Well, yes. I mean this sort of goes back, this will make sense I think from the narrative, which is the reason that big, big banks were buying from big projects is because big banks have their own legal teams that can do risk mitigation. And if you're buying a billion dollars of credits and you're saving 7 cents on the credit or 3 cents per dollar you can still afford and 1 billion, you can still afford to have five lawyers go in and do all the diligence for a year. A smaller buyer, a $50,000 buyer, a $1 million buyer, probably can't do that, probably don't have that kind of internal legal team. So I think the big ones could do it just because they have the infrastructure. What I have seen is some people are trying to get insurance. There's certainly an insurance market out there. It's nascent, it's young.



Michael Bergloff (15:01):

What would that cost us? Let's say a typical,



Ephraim Olson (15:03):

I've seen stuff in the 2, 3, 4, 5 cent per credit. Again, it's unfortunate because if you're talking about buying credit at 93 cents and you add 5 cents onto that 2 cents on a $50,000 credit, suddenly the headache doesn't make sense. So I hope that that insurance comes down. I have seen some creative structures that people will structure in such a way that they effectively have the diligence done and put things in place that guarantees or indemnities or bonds. There's things that I've seen people do on the sell side to help bring peace on the sell side to the buyer. But yeah, I mean it's a risk and that's why I think it's something that we as a community need to help solve, which is it's a risk that is solvable, but like you said, the buyer takes the shoes of the seller. And so if you have a crackpot seller who's out selling a project 55 times, right? I mean, it's a real thing. You could have a seller that builds a project or doesn't build a project and then sells the credits 500 times. There's no reason necessarily that they couldn't do that. I mean, they would go to jail, but they could technically do that. And then you would have 55 buyers who now don't have credits they thought they had. And so I think as tax professionals, we have to think through and sort of put in place structures or help our clients understand ways to do that.



Michael Bergloff (16:31):

Haven't that IRS kind of mitigate that with the registration portal or



Ephraim Olson (16:34):

I don't think so. So a seller has to register each credit project they have to go through and they get a number from the IRS I wished they would do a more vigorous vetting of those. My hope was that they would vet them and make sure that what they sort of stamped that this project exists, that it exists, and now they've sort of taken away the risk that it doesn't exist. My understanding is they do no diligence. I could, we could all send in a project right now as a group and tell them that we have a project in Arizona that's going on, and my guess is we would get a response in three weeks or two months saying, here's your number. Go sell your project. Right. Unfortunately, the IRS has sort of absolved themselves of this and have done nothing stepped out of the arena from my perspective. It's unfortunate.



Eric Gordon (17:24):

I was getting jealous of the two week response.



Ephraim Olson (17:27):

No, it's not. Two weeks get, it's more like I think they ask for 120 days for registration, so it's months. But what I'm saying, the point is that they're not going on site and they're not saying that once we give a registration number that credit exists and we're going to stand behind it and we're not going to question it. It's more like, I don't know. I don't even know the purpose at some point because all they're doing is sort of rubber stamping whatever the seller says is my understanding of what I've seen.



Eric Gordon (17:58):

And you mentioned structure E from, so I want to maybe go back just a second. I think a lot of us in this room are probably at this point more familiar with the old tax equity structure of taking place in solar credits and these solar projects. What's the main differences between the transferable tax credits compared to the tax equity structure?



Ephraim Olson (18:19):

The creation of the credit is the same, right? It's still a solar project, a wind project that gets put in and gets put in service. So the creation side is the same. It's the ownership that changes. So the old tax equity, there's 20 ways to do it. That person who needs the credit is owner for purposes of the credit through some partnership structure that allowed them to take the credits and allowed someone else to deal with the rest of the project. It was complicated and it was burdensome. This divorces that you don't need to have an ownership, some strange ownership structure through a very carefully crafted partnership agreement. This way I as a buyer or you as a buyer can be wholly independent of the project. No ownership, no nothing. You just are buying the credits and you're out. Unfortunately, there's still that sort of barrier that you're not the owner of my project.



(19:09):

So now you can't control what I do with the project, which means if I sold it tomorrow, you would have the recapture, not me. So that's what I'm saying. In some ways it, it's easier for the buyer in the sense that they don't have to be involved, they don't have to have all this stuff, but it's also harder for the buyer because now we as the tax professionals or the lawyers have to have something in place so that you as a non-owner can be protected from me doing something stupid as the seller. Does that make sense? Yep. So in the long run, it will be easier. My take is in the long run, this will be a much easier thing. There'll be a buy sell.



(19:47):

This will be an end of tax planning plan. So you do all your tax planning, you get the tax liability to where it is, and then if you can't do anything else, you buy credits and you bring it down another 10%, right? It just seems like that's, in my mind, that's what's going to happen. Do all the other tax planning. This is just an automatic must do, bring down that tax liability 5, 10, 8, 12, 15%, whatever the number is, and that's where it's going to end up. I think right now, helping our clients be able to transact in a world that's still young, I think puts a lot of responsibility on us and gives us a lot of opportunity to bring value to clients because we can help build structures so that you as the buyer can be sure that I as the seller, there's enough teeth in the contract or there's enough insurance or there's enough stuff that I have an incentive not to act, and if I did act in properly, you're protected. So I think that's on us to do right now. Awesome.



Eric Gordon (20:39):

And with that, Michael, I know maybe I'd love to paint another example from the CPA perspective client of how this is utilized in your practice.



Michael Bergloff (20:49):

So I deal with a lot of crypto folks and probably some of you aware crypto, is it as high as a kite? A lot of my crypto clients are just making a killing right now and with making a killing, they don't know what to really do with the tax liability. This is a new world for them paying for lack of better words, a shit ton in taxes, right Eric? And so what I see them more or less doing is they want to still stay in the, they don't want to divest, divesting crypto, but maybe still keep crypto and start divesting into other interests like real estate and different things. And so I'm seeing some of my clients where it kind of makes sense for them to form AC corporation, put a lot of their digital assets in the C corporation. And then again, we still have a liability as FRA mentioned, a 21% tax liability for federal income tax purposes. And we're looking at layering in energy credits into this as what I think Ephraim really articulated is kind of end all be all. This is just one of the default things that we do to help minimize the tax burden.



Eric Gordon (22:01):

Thank you. And Yuri, would you mind, I mean I know some of the questions are, well, how does it actually happen? What does that look like? Do you mind walking us through the steps there of how someone would take advantage of



Yuri Kapilovich (22:12):

This? Yeah, you left the most fun part to me that didn't you? The actual tax preparations state? Yeah, so I mean essentially what you would have to do is, I mean, one, obviously when you're dealing with someone like B10 Energy, you're going to get the full package that you're going to attach with the tax return and everything. But the key is you want to be able to identify the properties that's important. You have to get those pre-registration numbers that we were all talking about before, make sure that there's a corresponding project and it's all legit. And then on top of that, you have to make the transfer election with the return when you file it and fill out that 3,800. But like I said, the benefit in working with a firm like B10 is that they're going to give you all that information. They're going to give you the prefilled documentation. What was that form 4 34? What was it? The one that you



Eric Gordon (23:06):

Guys provided when we file it from 34 68 is where the credit's actually created. That's right when the anti files, your tax returns



Yuri Kapilovich (23:11):

You the 34 68 and then that'll go down the 3,800 and then you're going to attach all that and it'd be a nice package and then send that in, did every return. That's the general gist of it.



Eric Gordon (23:22):

Awesome. Awesome. Well, we want to make sure to allow for questions and so really appreciate the input, the answers, but let's open it up. Just questions, thoughts here for the panel? Yes. In the back there



Ephraim Olson (23:38):

And no questions will mean that we did such a good job



(23:40):

That you have no questions.



(23:41):

Yes Well, now we go look, we had one question. Well unfortunately



Audience Member 2 (23:47):

You guys are doing a good job. Thanks. There's a famous biofuel tax credit fraud scheme that in 2020 it was like a billion dollars of made up tax credits and ultimately there was jail time. I don't need you to speak to that, but I think when I think of unverified clean energy projects and you think about exchanges being created with demand to buy them at a discount, how do you think about the rampant fraud that we're going to see over the next few years that stem from this?



Ephraim Olson (24:27):

Well, at some level, I think in my mind there's no doubt that there will be fraud at some level. But again, the credits have been around for over a decade. The fraud could have the fraud. It will be easier to do fraud when you can sell to a third party, but it's not that different from the fraud that could have been created from a tax equity play. It's not so different in my mind. So I do think we have some case law on solar project or wind project fraud that happened in the past with tax equity where people put too much basis into the project or they double sold it or they tried to claim the credit on two owners of the thing. So I think we have a little bit of history on these credits that we didn't have say with the ERC credit where there was no history that was sort of brand new and it bloomed into something that no one really wanted.



(25:28):

I think we have a little bit more history on this, but I agree with you. I think it's something, again, we as tax professionals to be helpful to our clients, I think we need to be involved in the process. I don't think them buying on the open market is a good idea. So in my mind, the idea that there's some open free market that people are buying and selling, I think that will never happen. Not until the IRS gets involved and actually does their job until that time, I think it's on us to make sure that we help them place them with projects or people that have history that have done it in the past, that there's something more than just saying, Hey, open market project says that they have projects available, you should go buy those. I think if we do that, we're absolutely doing a disservice to our clients.



(26:13):

But I think if we can step in and say, I have contacts or I know people who know people or there's a company that's selling that has a history that we can look at their background checks or whatever the things are. I'm not saying how to do it. I'm saying you're all smart people. We all might do it differently. I hope there's some sort of gold standard of way of doing it. But I think we do a huge service to our clients if we can help them buy credits now because I don't think they can buy 'em on the open market without us. Does that make sense?



Yuri Kapilovich (26:42):

And I think the hope would be too is eventually that the IRS would also step up the actual looking at these



Ephraim Olson (26:48):

Projects they wish they were doing it right now.



Yuri Kapilovich (26:50):

Yes, and making sure that when you go and you fill out the pre-registration and you submit the documentation and they actually physically go and make sure that the project at least exists,



Ephraim Olson (27:00):

Stamps it and says once it's registered, you can be assured that we are going to take the position that those credits exist.



Michael Bergloff (27:06):

Well, and to play devil's advocate a little bit, it's not like these credits can be constantly transferred. They only be transferred one time. And the second point to that, to mitigate, I think this risk, I mean the fraud thing I think is going to be huge, but to find a verified seller, a leader in the market, and again, not to pat be tense back by any means, but



Yuri Kapilovich (27:27):

Just do it



Michael Bergloff (27:30):

They definitely do have a lot of credits and they do a lot of due diligence to make sure these are real projects. And so you want to find a good, I think Ephraim nailed it is you can find a crack bot seller that's going to sell these pennies on the dollar or find a professional firm that does their homework.



Ephraim Olson (27:50):

Again, I think that for us, this is actually a good thing in the sense that there's a place for us, if people could just go buy and sell these on the open market, why would they use us? Why would they pay us? Why would they have us involved? What I'm saying is we're essential to them being able to do this. We are absolutely essential to them being able to do this because we put our heads together. You sort of think it through and there's an answer and we can solve it and we can solve for them in a way they can't solve. We are essential. If it were sort of on rails and easy and you could just sort of transact on an open market on the internet on some marketplace, I don't know that they would need us. I don't know that we would earn our fees. This one, we're absolutely going to earn our fees in my mind. So wish the IRS did their job since they're not doing their job. We're going to get 'em, make a bunch of money from it.



Eric Gordon (28:40):

And maybe as a follow up, are there certain things to look for? We've mentioned some risk factors, the structure, certain things E from Michael, Yuri that you look for kind of initially to mitigate some of those right off the bat.



Yuri Kapilovich (28:54):

I could say from my perspective, and this doesn't just go for energy credits in general, it goes for any business that I do with anybody that I'm referring out to. I want to make sure that I have a trusting relationship with that, whoever it is, a referral source. That is very important to me because I think that the theme that I've heard in a lot of the presentations so far is US accountants carry a lot of trust with us and whoever we recommend, but the point being is whoever it is that you do go to for the energy credits for all these extra tax planning strategies, you want to make sure that their legitimate people, that they know what they're doing. I think that that gives me a lot of comfort as well. And having that package that comes with the actual credit and everything like that does solidify a lot of things and at least makes me feel good about it.



Ephraim Olson (29:44):

I think independent site verification, so every one of my clients have demanded that there's an outside independent site verifier to verify the credits exist to do sort of some of the verifications, background checks on the sellers, make sure they haven't been in jail before, fraud in the past or other things that would be a marker of a red flag maybe. Like I say, I don't want to tell you how to do it, but I'm just saying this is a solvable problem. It's an absolutely 100% solvable problem. In the right instance, you find insurance, right size of buyer, find insurance for them, help them find insurance. It is a solvable problem, but it does take some thought process to get it done.



Eric Gordon (30:26):

Awesome. Well thank you. No, thanks everyone for being here. Thanks to our panelists, I know we're running short on time. We'd love to continue on these conversations. If there's any questions we didn't get to, please grab any one of us. Please go by our booth. We are B10. Energy is the Batman company, if you've seen that. So easy to find. Easy to find. So we welcome any further questions that you have, and thank you so much for your time.