Lawmakers probe tax incentives received by solar-energy firms

Under investigation is how companies determine the value of the credits

Congressional lawmakers have launched a formal investigation into whether solar-energy companies improperly received billions of dollars in tax incentives from the Obama administration.

The Senate Finance Committee and the House Ways and Means Committee on Wednesday sent letters to seven foreign and domestic companies in the solar industry, expanding a more limited probe started earlier this year.

The recipients included three firms in the residential solar industry, SolarCity Corp., Sunrun Inc. and Sungevity Inc., and four solar utility companies—SunEdison Inc., Abengoa SA, NextEra Energy Inc. and NRG Energy Inc.

A spokesman for SolarCity said the “answers to the questions posed are fairly straightforward, and we will provide them as requested.”

Officials at SunEdison, Abengoa and NRG Energy declined to comment. NextEra, Sunrun and Sungevity didn’t respond to requests for comment.

Congressional investigators are examining the use of tax incentives for solar-power companies, third-party financing and how the companies determine the value of the credits.

The probe is being run by Sen. Orrin Hatch (R., Utah), the chairman of the Senate Finance Committee, and Rep. Kevin Brady (R., Texas), the head of the Ways and Means panel.

Earlier this year, Mr. Hatch began looking into the roughly $25 billion in cash grants that solar and other “green energy” firms have received during the Obama administration. He concluded that the Treasury Department and the Internal Revenue Service—which are also examining the valuations—don’t have adequate controls over the program.

At issue is a Treasury Department policy that gives solar firms a 30% investment tax credit on the cost of acquiring a system. The tax credit provides a dollar-for-dollar reduction in income taxes otherwise owed by a taxpayer; the companies could also opt to get a grant instead of a credit.

But the 30% calculation isn’t always straightforward because of the economics of the industry. Solar-energy developers don’t necessarily have the income to use the credits or the funds to buy and install solar energy systems. So they routinely enlist big investors and transfer the tax benefits. Some also lease systems to homeowners and businesses.

So there is debate over the fair market value of the solar energy systems—the price paid by a buyer, whether it is a homeowner or an institutional investor. Those calculations are made by independent appraisers, solar firms say, following IRS guidelines.

Over the years, Republican lawmakers have criticized the administration’s oversight of the tax incentive plan. Some Republicans have hoped to score political points by casting Mr. Obama’s tax incentive plan as a giveaway to the renewable energy industry.

Staff at the Senate Finance Committee said the Treasury Department and the IRS don’t have a long-term method for identifying companies that received the cash grants in the past to ensure they don’t apply for other tax incentives in the future for the same investments.

The Treasury Department’s inspector general had recommended the creation of such a tracking system. Congressional investigators found that the IRS had taken some steps toward doing so, but hasn't put in place a system to track the grant recipients in the long term.

Some investment tax credits can be carried on a company’s books for decades, so there is a worry that the IRS wouldn’t catch companies that were double dipping in the federal tax incentives.

A Treasury Department spokeswoman declined to comment, citing pending litigation.

The Treasury Department in 2012 began asking solar firms for more information on their calculations about the fair market value of solar energy systems that have been built, according to public filings by solar firms. And the IRS has said it was weighing whether the valuations have been inflated. The inquiries are ongoing.

“If the Internal Revenue Service or the U.S. Treasury Department were to object to amounts we have claimed as too high of a fair market value on such systems, it could have a material adverse effect on our business, financial condition and prospects,” Solar City wrote in a recent federal financial filing.

The firm has said that its valuations are correct, and even below Treasury Department guidance about where they should be. But it has said that its results could be affected if its position is disputed by a federal audit, the outcome of the Treasury investigation, or changes in guidelines. This could force them to reimburse some institutions that buy their tax credits as investments.

In its 2015 annual report, Solar City said that if the government determines that misrepresentations were made, “the Department of Justice could bring a civil action to recover amounts it believes were improperly paid to us.”

Solar City received about $501.2 million in credits through Dec. 31, 2015, so even a 5% adjustment downward “would obligate us to repay up to $25.1 million to our fund investors,” the company wrote.

The green energy tax program was launched in 2009 as part of President Barack Obama’s plan to stimulate the U.S. economy and promote investments in renewable energy in the aftermath of the financial crisis.