Why Use Your Own Capital When You Can Use Your Taxes?

There's an impressive, unlimited Federal subsidy available for supporting renewable energy called the Investment Credit (aka Investment Tax Credit or ITC).  Congress established the ITC through the Energy Policy Act of 2005 (EPAct).  President George W. Bush (#43) signed the energy-friendly legislation into law in Albuquerque, NM on August 8, 2005 to provide incentives to taxpayers to develop clean energy.  Kansas Freedom Farms, LLC is doing just that. 

This immense benefit is still readily available.  Learn how it can benefit you as many US taxpayers have taken advantage of the ITC for both commercial and residential purposes.

This lucrative Federal subsidy allows taxpayers such as individuals, corporations, trusts, estate owners and capital gains beneficiaries (both long-term and short-term) to convert their Federal Tax responsibilities into tax credits for renewable energy investments and be compensated handsomely for doing so.  Let's explore how this is possible and being done today.

Energy Credits in America Came About for 3  Primary Reasons: 

1)  Reduce dependency on foreign oil (1970's oil crisis/embargo)

2)  Reduce or eliminate pollution and environmental concerns  

3)  Create jobs + economy {Social Impact} = ROI to US Treasury 

The Joint Committee on Taxation Report made public on March 12, 2019 illustrates this.

We leverage the Investment Credit for equity financing needs and low-cost structured debt to procure capital in order to create our inventive and inspiring "ag tech campuses" in strategic locations.  We encourage potential tax-credit partners and other stakeholders to research the ITC and how both active (nonpassive) and passive liabilities can be monetized.  

Words to the wise: Seek counsel from those who know how the ITC works. 

Many accountants and tax attorneys are not familiar (enough) with the ITC.

In fact, many are not aware of the IRC Sec. 469(c)(7) exception that allows trusts, estates and closely-held C-corps. to forego the PAL (Passive Activity Loss) rules to participate as "active" investors (nonpassive) with us because of the real property development aspects.  

This is a major benefit.

{See US Tax Court Decision:  Frank Aragona Trust vs Commissioner on March 27, 2014.} 

By meeting one "Material Participation" step, investors can be designated as "active" rather than passive.  An individual (SSN) can be designated as a nonpassive investor by having an active real estate license OR by demonstrating any 1 of 7 possible prerequisites.  

An organization (EIN) can be designated as a nonpassive (active) investor (that passes this designation and related benefits to its stakeholders) by demonstrating these two steps:

1. EIN (LLC, S-Corp, C-Corp) has 50% (+) of its services related to real-property development

2. One (+) person works 750+ hours in real property development related efforts for Tax Year

This is what our Special Purpose Entity (SPE aka Single Purpose Entity) does with each clean energy project we develop on real property to host vertical farms, data centers, etc.  This means our tax-equity investors are automatically "active" and exempt from PAL restrictions. 

The 7 ways for individuals and pass-thru entities to be "active" (nonpassive) investors and NOT involved in services related to real property development are on the IRS.gov website.

The 7 measures are listed below and can be easily achieved in many cases including with us.

Active investors (nonpassive) who are natural persons {or pass-thru recipients responsible for taxes} need to meet only 1 of 7 possible "material participation" requirements.

Material Participation Tests if NOT developing real property:

• Test 1:  Participation for more than 500 hours.
• Test 2:  Activity that constituted all participation substantially.
• Test 3:  Involvement for 100+ hours and not less than participation of others.
• Test 4:  which is a significant participation activity, combined with all significant participation activities, for more than 500 hours. A significant participation activity is a business in which the taxpayer participates, without qualifying for any of the other six tests, for more than 100 hours.
• Test 5:  Participation during any five (5) of the preceding ten (10) taxable years.
• Test 6:  Which is a personal service activity, for any three (3) prior taxable years. Personal service activities are activities in which capital is not a material income-producing factor such as health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
• Test 7:  Partaking for more than 100 hours and based on all the facts and circumstances, on a regular, continuous, and substantial basis.

{See US Tax Court Decision:  Clarence M. and Myna G. Leland vs Commissioner on Dec. 14, 2015.}

Consistent with this beneficial statute, individuals can be active (nonpassive) investors in commercial enterprises and work remotely...never having to step foot, literally, at or near the actual facilities.  This allows our tax-credit investors to participate remotely regardless of where they live or operate.  We tailor their tax benefits to their specific tax situations and opportunities.  The SPE leaders and employees meet "material participation" requirements for the investors.

{See US Tax Court Decision:  Fred B. and Lisa M. Barbara vs Commissioner on May 13, 2019.}

Taxpayers are eligible for the at-risk components of tax-credit investing in renewable energy provided there is personal liability of borrowed amounts and/or recourse debt obligations even if the tax-credit investors do not have any out-of-pocket capital or resources leveraged for the project(s). When the partnership has diluted interests, lenders generally do not require personal guarantees while maintaining legal recourse in the event of fraud or wrongful acts, etc.

This maintains compliance with at-risk requirements w/o additional financial exposure.

The "ag tech campuses" are commercial real estate developments and, as such, have the borrowed amounts secured by real property mortgages {Section 49 at-risk rules}.   The clean energy systems are designed and installed as permanent infrastructure making these assets real property (not personal property) supported by the Real Property definition (Cornell Law).  

The IRC Section 465(a)(6)(A)(B) language confirms energy systems can be designated as either real property (tangible) or personal property based on design, function and production profile.  

Our "ag tech campuses" design and integrate the alternative energy systems to meet the specific Section 48(A)(5)(D)(II) requirements for "other tangible property" that is integral to the qualified investment credit energy property without being part of the building or structural components.   Additional compliance is found in Section 48(A)(5)(D)(iii) and (iv).

Section 48-1(a)(ii) Other Tangible Property Definition:

"In addition to tangible personal property, any other tangible property (but not including the building and its structural components) used as an integral part of ... furnishing electrical energy or storage facility used in connection with such, may qualify as Section 38 property." 

Structural Component Legal Definition Section 48-1(2):   

"The term “structural components” includes such parts of a building walls, partitions, floors,  and ceilings, as well as any permanent coverings therefor such as paneling or tiling; windows and doors; all components of a central air conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs; escalators; and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building." {Cornell Law School Legal Information Institute}

The cost basis for our ag tech campuses (developments) includes real estate acquisitions and related fees/expenses such as those noted from IRS Publication 551 (December 2018):

  The basis of property you buy is usually its cost.

The cost is the amount you pay in cash, debt obligations, other property, or services. 

Your cost also includes amounts you pay for the following items:

• Sales tax.
• Freight.
• Installation and testing.
• Excise taxes.
• Legal and accounting fees (when they must be capitalized).
• Revenue stamps.
• Recording fees.
• Real estate taxes (if assumed for the seller).

You may also have to capitalize certain other costs related to buying or producing property.

Cost basis guidelines and "other tangible property" definition confirm real estate purchases and development are part of the ITC-eligible cost segregation items for our nonpassive enterprises. For our innovative pursuits, land costs are essential and necessary to provide a tangible location to support the designs, engineering, functions and purpose for renewable energy production. Equipment is part of the tangible property that is ITC eligible and defined as "Tools, be they devices, machines, or vehicles. Assist a person in achieving an action beyond the normal capabilities of a human. Tangible property that is not land or buildings, but facilitates business operations."  {Black's Law Dictionary}  This is consistent with Sec. 48 "energy property."

This compliance enables Kansas Freedom Farms to customize tax-equity investments and "partnership flip structures" to use the subsidy more effectively and provide greater net ROI.

Our systems are off-grid power sources that are not severable implements and cannot be "readily remedied" if removed.  This infrastructure is not portable.  The ag tech campuses are dependent on the power infrastructure for viability.  Removal creates financial duress.  

Our strategy to monetizing the ITC is superior to the C-Corp. + PPA = PAL method most use.

One technique we have is  putting a construction-to-permanent loan (structured debt) in place to complement tax-credit financing that the Special Purpose Entity (i.e. LLC, S-Corp, or C-Corp) procures to complete buildout(s).  This debt obligation satisfies at-risk requirements even if no personal guarantees are req'd by the lender.  The lender does not waive its right to recourse beyond the SPE's assets in the event of fraud.  This conventional risk exposure is mitigated by the fact the lender will have "lock box" control for A/R, A/P, reconciliations and shared data files.  

Lender's Trust Dept. and Operations Dept. assure compliance and financial safety at all times.

As noted at the top of this page, the Energy Policy Act of 2005 was signed into law on August 8, 2005 by President Bush and established the Energy Credit (Section 48 of Tax Code). It includes renewables such as biomass, geothermal, hydro, solar, wind and others. There is no limit to the number of tax dollars a taxpayer can convert to Investment Credits (Form 3468).

Our tax-credit partners use ONLY their Federal taxes as equity funds and receive write-offs each quarter and/or year to lower future taxes owed. Tax-credit partners continue to do this until they receive 100% net ROI on the tax credits provided within typically within 1-5 years.  

This means tax-credit contributors eventually receive exactly the same amount of money back to them through future tax savings as they have put into the projects (on behalf of the gov't). This can be done on a rolling basis quarter after quarter or year after year through completion of the final phases of our project(s).  We can customize participation.   Each situation is unique.

As noted, our tax-credit participants can be tax-free for the Tax Years ranging from 2019-2038 (20 years) or longer if eligible for credits.  Depending on each taxpayer's situation and financial goals, the Bonus Depreciation (Section 168) and Accelerated Depreciation (Section 179) can be tailored to each taxpayer's obligations to achieve the best results while optimizing credits.  In addition, a number of legal debt obligations meet the at-risk requirements to allow taxpayers to leverage the ITC.  This includes (but is not limited to) asset liens, letters of credit, loans, promissory notes, and resource pledge(s).

{See US Tax Court Decision:  Donald R. and Sheila E. Golan vs Commissioner on June 5, 2018.} 

We offer Errors & Omissions (E&O) and Professional Liability insurance as well as surety from an A+ underwriter to protect tax-equity investors.  This tax assurance represents "good faith" elements of consultation and provides indemnification support for our stakeholders. We provide independent accounting that works directly with stakeholders and lenders. 

We offer tax insurance/assurance for tax-equity investors through recapture periods.

Tax-equity compliance is assured through third-party auditing and specialty risk protection in the way of insurance indemnification for any potential tax corrections, adjustments, or penalties.  We retain credible, quality tax advisors and energy professionals that offer indemnification.    

{See US Tax Court Decision:  Helen Korchak vs Commissioner on August 30, 2006.}  

Further assurance (indemnification) is provided by the clean energy system designers and engineers who are intimately familiar with the ITC and which technologies, materials, supplies, labor, professional services and other components are specifically eligible for energy credits treatment.  These alternative energy experts provide a performance bond (or insurance policy) for their determinations of ITC compliance.  This further assures accuracy and compliance.

You may want to review Section 7491 Burden of Proof requirements for the Secretary to be responsible for bearing proof of taxes owed/not owed rather than the taxpayer (Cornell Law).  

You will find our enterprises are expertly positioned to maximize multiple incentive programs within several ascending industry sectors while effectively mitigating even the most minuscule of risks with thorough due diligence, project preparation and professional relationships.  

IRS Publication 551 (December 2018) details how real property acquisitions or improvements contribute to cost basis.  There are several indirect costs that are also included in cost basis. 

This document provides a definition of Real Property as:   Real property, also called real estate, is land and generally anything built on or attached to it.   {See Section 48 for more information}    If you buy real property, certain fees and expenses become part of your cost basis in property. 

Signed into law August 8, 2005.  Click below for comprehensive 551-page official document.

 The proposed amendments to the accredited investor definition would add new categories of natural persons based on professional knowledge, experience, or certifications.  The proposed amendments would also add new categories of entities, including a “catch-all” category for any entity owning in excess of $5 million in investments.  More info is available via link below.