An Alternative to 1031 Exchanges

IRC § 1400Z-2, under The Tax Cuts and Jobs Act of 2017, established an investment program designed to provide preferential tax treatment for investment in developments located within certain designated economically distressed communities known as “Opportunity Zones”. All 50 states, the District of Columbia, and each of the five U.S. territories, have Opportunity Zones within their borders.

To qualify for preferential tax treatment, capital gains earned from a prior investment must be reinvested in a Qualified Opportunity Fund, which is a partnership, corporation, or limited liability company formed for purposes of investing in eligible property located within an Opportunity Zone.

Investment in a Qualified Opportunity Fund offers taxpayers three primary tax incentives:

1. Temporary deferral of tax on previously earned capital gains that are invested in a Qualified Opportunity Fund until the earlier of the date the opportunity zone investment is sold or exchanged, or December 31, 2026.

2. Reduction of capital gains tax liability through a graduated step-up in basis of the Qualified Opportunity Fund original investment equal to 10% if the investment is held for at least 5 years, and 15% if the investment is held for at least 7 years.

3. If the investment is held for at least 10 years, the appreciated value can escape capital gains tax through an increase in the adjusted basis of the Qualified Opportunity Fund investment to equal its fair market value on the date that the investment is sold or exchanged.

To qualify for the above incentives, gains must be invested in a Qualified Opportunity Fund within 180 days of the day on which the capital gains would have to be recognized (subject to certain exceptions for pass-through entities and certain types of capital gains) if not for deferral under IRC § 1400Z-2.

For more information, please contact Gary E. Gudmundsen in the Saginaw, Michigan office at 989-791-4632.

Ohio General Assembly Extends County’s Option to Grant “Payment In Lieu Of Taxes” For Energy Projects

As the renewable energy industry continues to grow and alternative forms of clean energy (wind, solar, hydro, geothermal, biomass, etc.) proliferate nationwide, state lawmakers are more than ever discussing comprehensive approaches to energy policy.  Indeed, states across the country are rapidly reconsidering the diverse array of laws that impact energy developers / public utilities, including those related to the tax treatment of renewable energy facilities.   This article, in particular, focuses on Ohio’s property tax laws as applied to commercial-scale renewable energy projects.

On July 18, 2019, in HB 166 (State Operating Budget), the Ohio General Assembly extended by two years the option for counties to offer renewable energy projects a “payment in lieu of taxes” (“PILOT”).  The law now sunsets at the end of 2022.

Ohio’s PILOT Statute: In 2010, the Ohio General Assembly passed Senate Bill 232 to ensure a reasonable, predictable tax climate for owners of renewable energy generation facilities.  The permissive legislation created a new choice for counties to determine how to tax renewable energy projects.  Under the PILOT statute, renewable energy developers remit to the county a fixed annual amount per megawatt payment in lieu of real and personal property tax.  This payment in lieu of taxes enables developers whose projects meet certain conditions to avoid excessive property tax liability.  Without the PILOT, building capital intensive (but fuel-free) large scale wind or solar facilities had proven to be cost-prohibitive.

Under the PILOT statute,[1] wind developers pay $6,000 – $8,000 per MW annually, depending on the percentage of Ohioans employed during construction—which must be at least 50%. (The higher the ratio of Ohio-domiciled employees, the lower a project’s tax liability).  For solar projects, developers pay $7,000 per MW but must employ at least 80% Ohio residents.  County commissioners may negotiate additional service payments, not to exceed $9,000 per MW in total when combined with the PILOT.  Originally passed with a sunset, the law has been extended several times and in HB 166, the state legislature extended the PILOT option two more years—through 2022.[2]

Additionally, project developers receiving the PILOT must meet the following requirements:[3]

1. Road Repair: Developers must repair all roads, bridges, and culverts affected by construction and restore them to their preconstruction condition—as determined by the county engineer in consultation with the applicable local jurisdiction.

  • If the county engineer deems any road inadequate to support the construction / decommissioning of the facility, the road must be rebuilt or reinforced based on the county engineer’s specifications.
  • Developers must post a bond (in an amount established by the county) to ensure funding for all roads affected during construction and decommissioning.

2. Fire / EMS Training: Developers must provide training for fire and emergency personnel to respond to emergencies related to the project. In addition, developers must provide the fire/emergency responders with proper equipment.

3. Industry Training / Apprenticeships: Projects must establish a relationship with a state institution of higher education[4] to educate and train individuals for careers in the wind or solar energy industry.  The relationship may include endowments, cooperative programs, internships, apprenticeships, research and development projects, and curriculum development.

Tax Liability without PILOT: Without the PILOT, a wind or solar project’s equipment / real property would be taxed based on rates established by the jurisdiction in which the facility is located.  But prior to applying the local tax rate, the state sets the “taxable value” of the property and considers asset depreciation.  The process is described below.

1. Taxable Value: Under Ohio law,[5] the taxable value for a facility’s “taxable production equipment” is 24% of its true value.  Taxable production equipment includes all taxable renewable resource equipment used to generate electricity, but excludes “energy conversion equipment.”  Energy conversion equipment is defined as “tangible personal property connected to a wind turbine tower . . . or connected to any other property used to generate electricity from an energy resource, through which electricity is transferred to controls, transformers, or power electronics and to the transmission interconnection point.”  The state categorizes this type of equipment as “other taxable property.”  The taxable value for “other taxable property” is 85% of true value.

2. Depreciation: After assessing the property’s taxable value, the state considers asset depreciation.  Ohio utilizes a 30-year depreciation schedule for all different types of energy equipment.  Under the schedule, the year 1 tax value for production/transmission equipment would be 98.3%; year 2 would be 95%; and year 3 would be 91.7%.[6]

3. Tax Liability: Once the state determines the taxable value of all the project’s property/equipment after depreciation, the applicable county will apply its local tax rate to determine the project’s overall tax liability. The local tax rate is typically between 6% – 8%.

All things considered, Ohio’s PILOT program reduces property tax liability for owners of commercial scale renewable energy generation facilities.  However, the annual tax revenue generated under the PILOT for one wind project is typically between $500,000 and $1,000,000, all of which flows to schools and other local government entities.  This has undoubtedly contributed to multiple Ohio localities deciding to utilize the PILOT, including Paulding and Hardin counties.

For more information, please contact the attorneys listed below.



[1] OHIO REV. CODE § 5727.75.
[3] SEE R.C. 5727.75(F).
[5] SEE R.C. 5727.111(H).

IRS Beginning to Send Affordable Care Act Notices to Religious Organizations

According to statements made by the acting director of exempt organizations at the IRS, churches and other religious organizations will soon start to receive questions from the IRS about potential liabilities under the Affordable Care Act.

Over the last few years, the IRS has sent letters to employers that it suspects have failed to comply with the Affordable Care Act’s reporting requirements. Those requirements provide that all employers who average 50 or more full-time employees/full-time equivalent employees during the previous calendar year (known as “Applicable Large Employers” or “ALEs”) must prepare and mail Forms 1095-C for each full-time employee, along with Form 1094-C, a transmittal Form that helps to indicate whether an employer may be subject to a penalty for failure to offer sufficient health care coverage under ACA’s employer shared responsibility rules.

It appears that the IRS is cross-referencing the number of W-2s each employer has filed to determine whether the employer is an ALE, and thus may have failed to file the correct Affordable Care Act returns. Penalties for failing to file and furnish returns to employees can be as much as $540 per return.

According to Margaret Von Linen, Director of Exempt Organizations, the IRS has begun targeting churches and other religious organizations as part of a compliance program that will run through August 2019. She made these statements at the TEGE Exempt Organizations Council meeting on June 28, 2019.

Employers that receive letters inquiring as to whether they are ALEs should reach out to an experienced employee benefits practitioner to determine whether or not they are an ALE. If they are an ALE, a benefits attorney can help craft an explanation as to why a filing was not made timely.

Additionally, employers of all types with 50 or more full-time/full-time equivalent employees that have not filed their 2015, 2016, 2017, or 2018 Affordable Care Act Forms with the IRS, should consider doing so as soon as possible, to minimize potential penalties.

Eric W. Gregory is an Associate in Dickinson Wright’s Troy office where he assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and non-qualified compensation programs. Eric can be reached at 248-433-7669 or and you can visit his bio here.

Protect Your Assets by Having a Will or Trust in Place

Has a client decided to leave their bank account or entire estate to one of their children, who will “do the right thing, and distribute it equally among all of my children”? Discuss with your client that this scenario creates 2 problems: 1) Child receiving the account/inheritance is not legally obligated to give any of the assets to client’s other children; and 2) Child may suffer gift tax consequences if they honor client’s wishes to give part of what they receive to client’s other children. In 2019, each individual may gift $15,000 to another individual in 2019, without filing a Form 709 Federal Gift Tax Return. This is referred to as the “annual exclusion amount.” If the amount given to another individual is over $15,000, a gift tax return is required to be filed on April 15 of the year following the gift. Any amount over $15,000 is subject to gift tax. Each individual has an $11.4 million federal lifetime gift and estate tax exclusion amount, which can be allocated to amounts over the $15,000 annual exclusion amount, but again, a Form 709 Federal Gift Tax Return is required to be filed. Bottom line: Talk to your client about having a properly prepared Will or Trust in place so that assets pass directly to their loved ones at death, rather than taking “short cuts” that create tax issues for their loved ones, and worse, may be unenforceable. For further information, contact Joan Skrzyniarz in the Troy, Michigan office at 248-433-7521.