Section 707(b): Related-party electricity sales
Partnerships that own renewable energy projects should be able to sell electricity to one of the partners without causing loss of valuable tax depreciation, the US Chamber of Commerce said.
Under the US tax law, a company cannot claim a loss on a sale of property to an affiliate. Electricity is considered “property” for this purpose. Depreciation on most renewable energy facilities is taken on a front-loaded basis over five years. Most wind and solar projects report tax losses at least through the first three years. They are considered to generate electricity during this period at a loss.
Electricity from many projects is sold into an organized spot market. Such projects cannot be financed currently unless there is a hedge or other arrangement to put a floor under the electricity price. One way to put such a floor under the price is for the project developer to enter into a back-to-back arrangement where it buys electricity from the project for a fixed price and then resells it into the spot market. However, section 707(b) of the US tax code will prevent the partnership from claiming net losses during whatever period the project is running a net loss due to depreciation. Therefore, such back-to-back arrangements are usually structured as swaps so that there is no electricity “sale.”
The IRS has declined in private letter rulings to say that section 707(b) does not apply where there is an actual sale. (For a recent example, see “Utility partnership flips” in the June 2020 NewsWire.)
The IRS is collecting comments about issues it should address in its next priority guidance plan for the period July 1, 2021 through June 30, 2022. The Chamber asked the IRS in a letter at the end of May to put the issue on the list.