Green energy tax breaks

April 28, 2010 | By: Robert A. Green, CPA

This article will appear in an upcoming “green” issue of Micro-cap Review Magazine (

Investors in green businesses need to sort the green hype from the truth. The government knows this difficult reality and has enacted many tax breaks for the green-energy industry over the past few years. Unfortunately, the tax breaks are complex and often wasted. If you’re interested in taking on a green-energy project, or investing in one, consider these ideas for tax savings. The key is learning about the many tax breaks green-energy undertakings are eligible for. 

Green-energy projects resemble hedge-fund structures in legal form, but their business model is far more complicated. Green energy co-generation facilities are expensive, long-term ventures requiring community approval, modern design, complex installation, efficient operations and guaranteed power-purchase agreements with local utilities. 

As a tax writer in the trading and hedge-fund industries, I have an interest in going green for my own social and business purposes. Decades ago, I discovered a unique way to overcome Section 469 passive-activity loss limitations, a tax change that slowed down the private syndication business in real estate and film (the old tax shelters). I created “active investors,” allowing investors to overcome passive-activity rules. This concept is helpful to green-energy syndications now, too. 

Active investors
Our “Green Energy Active Investors” program is an add-on module to a traditional investment-management business structure. With a private-investment limited liability company (LLC) structure, you can allocate many tax breaks to active investors in a separate LLC class, and counterbalance it by allocating more cash flow to passive investors. 

IRS code Section 469 restricts passive-loss deductions to passive-activity income. Most green-energy projects generate losses in the early years and suspending those tax breaks is inefficient and unattractive. Instead, you can set up a vehicle such as an LLC intended for active investors only. Passive investors can buy into a green-energy fund instead. 

Active investors have the opportunity to satisfy the IRS’s rules for “material participation” which navigates around Section 469 passive-activity loss rules. That allows active investors to use pass-through tax breaks, including green-energy tax breaks as well as other business tax breaks. 

The only caveat for some tax breaks including tax losses is the active investors must have sufficient cost basis in the project in order to write off tax losses. Active business owners in pass-through vehicles can only report tax losses up to their cost basis; excess losses are suspended to future years. Active investors can build up cost basis in later years by contributing additional personal-business expenses to the project. 

Active investors may incur expenses including travel, meals, entertainment, supplies, home-office expenses, dues, publications, research, furniture, fixtures and equipment, professional fees and more. These expenses can be contributed to the company and added to the investor’s cost basis. The active investor can deduct these expenses on his or her individual tax return (Schedule E) as “unreimbursed partnership expenses” (UPE). This is safer than deducting these expenses on the company level. If the active investor is overly aggressive on expenses, it’s not at the risk of the LLC vehicle or the other investors. This applies to material participation standards as well: Each investor needs to make that assessment and is responsible for that determination, not the LLC. 

Consider setting up special-purpose green-energy investment funds (Green Fund LLCs). You can have multiple classes of LLC membership interests. Each green energy project should be owned in a special-purchase vehicle formed in the local state and city; we’ll call it the “Project LLC.” The Green Fund LLC can own a portion of the Project LLC to get pass-through tax breaks, or it can own the equipment and lease it to the Project LLC. In addition, you can set up a management company to service the Green Fund LLC and Project LLC. You can earn and collect management and performance fees.

Special-purpose local Active Investor LLC vehicles can be set up too. These can own interests in the Green Fund LLC, Project LLC, and management company LLC if desired.

Recruit active investors to overcome “Not in my back yard” 
Often, a big obstacle in these projects is people in various communities take the “Not in my back yard” (NIMBY) stance. Although many Americans may embrace the green energy agenda, far too many don’t want a green energy project in their neighborhood. 

This is where the active investors come into play. Set up active-investor vehicles in local communities in which you are trying to sell a green energy project. Recruit local builders, architects, contractors, attorneys, accountants, doctors, quasi town officials, politicians, media owners, promoters and more as active investors. These VIPs can help convince their neighbors to vote “yes” on green-energy projects. 

Give your local active investors the lion’s share of the up front tax breaks. (Remember, active investors need to have cost basis to reap these tax benefits.) They will put up some cash and incur their own expenses, providing tax savings even beyond the green-energy tax breaks. The green-energy tax breaks offset the cash investment; this plus the active-investor tax breaks makes the investment a home run. And, local active investors help overcome the NIMBY problem. 

Green-energy tax breaks
There are many sources for green-energy incentives: federal, state, county and local governments; quasi-governmental organizations dedicated to making green-energy projects happen; utilities offering co-generation guaranteed power purchase agreements; private green energy investment funds; and more. 

For current federal incentives, see the U.S. Department of Energy (USDE) page “Tax Breaks for Businesses, Utilities, and Governments” at:

For state, county and local incentives see:
The Database of State Incentives for Renewable Energy (DSIRE).

Federal incentives generally include tax credits for the production of electricity from, and facilities that use, wind, refined coal, geothermal, biomass, solar, and combined heat and power systems. In some cases, a subsidy can replace a credit.

Tax credit bonds are attractive incentives too. Public sector bond issuers obtain 0-percent interest-rate financing. The investors in the bonds receive tax credits in lieu of bond interest payments. The Recovery Act materially expanded the national limits on bond principal. Find out if your project qualifies for this financing incentive and the limit available in your state. 

Although there’s a long list of incentives, note that some expire soon when you consider the long timetable for making a green-energy project operational. This highlights the inherent problems with tax incentives. Can businesses count on an extension of these breaks?

Co-generation guaranteed power purchase agreements
The most important element of any new business is the consistent generation of cash flow revenues. Co-generation guaranteed power purchase agreements (PPAs) solve this need. 

A utility provider is a valued partner. It can offer specifications and a coveted co-generation guaranteed PPA to automatically buy all the power you generate at a fair and regulated price for resale to their customers. Connect to their grid, turn the switch on and you’re in business. 

PPAs vary by utility and state. Before you consider a local project, check the available agreements in your targeted communities. Speak with your local utilities about becoming partners. Click here to learn more about power purchase agreements.

However, it’s crucial to know the risks here. Co-generation revenues and tax incentives are only tapped when a project is approved and underway. Significant development costs before this time may not be recouped from incentives and co-generation if the project never becomes operational.

Bottom line
Think green: Consider a green-energy project and related business, go green and make green. The tax incentives in this arena can be like picking juicy fruit off a green tree.