Base case models in tax equity deals can take a person quickly into the weeds, but the details are important.
Final regulations the IRS issued in July are a reminder not to increase the “outside bases” of partners in the lessee in an inverted lease by the income they have to report on account of claiming an investment tax credit.
Inverted leases are a form of tax equity structure used in the solar market.
The lessee in an inverted lease claims the investment tax credit on solar equipment, but must report half the credit as income over five years.
The lessee is usually a partnership between the tax equity investor and the project developer. The developer keeps a tiny interest as the managing member.
Each partner has an outside basis that it uses to calculate its gain or loss on sale of its partnership interest. The outside basis normally increases as the partner is allocated income.
Some tax equity investors were using this so-called section 50(d) income to push up their outside bases and then claim a capital loss for the same amount by withdrawing from the partnership after the flip date when the investor’s interest in the lessee falls to a small percentage.
The IRS put a halt to the practice of claiming a later loss equal to the section 50(d) income in temporary regulations in 2016. (See “IRS Addresses an Inverted Lease Issue” in the August 2016 NewsWire.)
It said the section 50(d) income is not really partnership income. It starts with the partners. Therefore, it does not run through partner outside bases. The IRS reaffirmed this position last month in final regulations.