Which Lease Agreement Could Preclude the ITC?
In a previous post you discuss how solar providers can set up lease arrangements with nonprofits, which will allow the solar provider to take advantage of the federal investment tax credit. However our accountant has advised us that the type of lease arrangement you discuss – with an option to purchase after five years – would be considered a capital lease and as such the tax credits would flow not to the solar provider but the nonprofit entity (who, of course, could not use them). This is backed up with definitions from the following website. Any thoughts?
Thank you for the follow-up question. While we can not give you direct legal advice on this forum, we can say that the issue of whether a lease is categorized as a capital lease or tax lease is highly fact specific. Tax leases — although often running for 10-year lease terms — also can be structured with early purchase options to pay off the lease after 5 or 6 years. There is not a hard rule based on duration. However, for purposes of incentives under the American Recovery and Reinvestment Act of 2009, cash grants are subject to a five-year recapture period; if an applicant disposes of the eligible property to a disqualified person (as defined in the guidance, such as a nonprofit entity), or the property ceases to qualify as an energy property during the five-year period after the property is placed in service, a portion of the cash grant may have to be repaid to the U.S. Treasury. Because of these complexities, consultation and advice from professionals is recommended for any particular set of facts and circumstances and to ensure the appropriate structure of solar lease agreements.
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