CNG Tax Credit Financing for Tax-Exempt Entities
How can a non-taxable entity take advantage of the alternative fuels tax credit system?
Both the Federal Government and the State of Oklahoma have significant tax credits available for the installation of alternative fuel filling stations including compressed natural gas (CNG) equipment. A tax exempt entity can benefit from the reduced price of utilizing CNG to fuel its vehicles by leasing a CNG fuel filling station. Under the new tax laws passed in December of 2010 and going into effect January 1, 2011, the Federal Tax Credit on fueling equipment was capped at $30,000. The Oklahoma State Tax Credit remain at 75% of the equipment cost with no cap.
Both Federal and State law states that the tax credits are only available to the “owner” of the equipment and vehicles. Blue Energy Fuels LLC (BEF) can utilize the tax credits by leasing the equipment to the tax-exempt entity. By retaining ownership, BEF receives the tax credits and can pass a portion of the saving generated from utilization of the tax credits on to the tax-exempt entity through reduced lease payments. This system provides a mechanism for BEF to generate the funds necessary to finance the CNG fuel filling station and reduces the lease payments paid by the tax-exempt entity. By using a capital lease, the tax-exempt entity can take full ownership of the equipment by paying the fair-market-value of the equipment at the time of purchase.
Blue Energy Fuels finances the purchase of the equipment and the construction of the CNG fuel filling station by passing the majority of the tax credits on to BEF’s investors. This system provides BEF the capital to build and operate state of the art fueling stations and provides the tax-exempt entity a significant reduction in the monthly lease payment, with virtually no out-of-pocket expense to get the system up and running. Infrastructure such as concrete, electrical service connections, plumbing tie-ins and safety enclosures are not part of the tax credit system.
Another significant advantage to this lease system is the fact that the lease agreement between BEF and the tax-exempt entity includes all service and repairs required by the fueling station during the term of the lease.
How is the lease rate determined if a tax-exempt entity leases the equipment from BEF?
The lease rate is a monthly charge for natural gas compression services. The tax-exempt entity actually purchases natural gas from the local natural gas utility at bulk rates. The more natural gas purchased by the tax-exempt entity and compressed at the fueling station, the cheaper the per gallon charge for compression services. Some utilities will allow the city or school district to combine their natural gas purchases for operating buildings to be combined with the natural gas purchases for CNG into one bulk purchase agreement.
It will take years for most entities to acquire a large number of CNG vehicles, how is the lease rate calculated during this ramp up period?
BEF calculates the total construction and equipment investment, subtracts the capital provided by its investors and calculates an annual base operating expense. The annual base operating expense is divided by twelve and this becomes the base lease price. The base lease price is billed to the tax-exempt entity each month until the consumption volume exceeds the base lease rate. The base lease rate is extremely low as a result of the money provided by our investors.
Remember these advantages.
• Low initial capital outlay for start up of the CNG fuel filling
• Full service and repairs for the CNG fuel filling station during
the lease term.
• State of the art equipment.
• The higher the fuel use the lower the per –gallon compression
charges utilized in determining the lease rate.
How can a tax-exempt entity take advantage of the tax credits available for converting vehicles or purchasing CNG ready vehicles?
Just like the tax credits available for fueling equipment, tax credits are available for the purchase of CNG ready vehicles and the expense of converting a vehicle to CNG. This is only available in the State of Oklahoma, the Federal tax credit for conversions and new CNG equipped vehicles ended in 2010. The Oklahoma State Tax Credit on conversions and vehicle purchases is 50% of the incremental cost. A tax-exempt entity can benefit from the tax credits by leasing vehicles from BEF with a portion of the savings generated from the tax credits being passed on to the tax-exempt entity through reduced lease payments. BEF can facilitate both vehicle conversions and leases.
Alternative to the lease system.
If a tax-exempt entity desires to own the compression system and vehicles from day one, the State of Oklahoma offers a “0” interest loan program for cities and counties desiring to purchase alternative fuel equipment and rolling stock. This program does not allow the tax-exempt entity to utilize the Federal or State tax credits, since the owner of the credits cannot transfer the credits.
Do we have to lease, or can we buy?
Blue Energy Fuels can sell outright any of the equipment to a tax-exempt entity. A direct purchase does not allow a non-taxable entity to utilize the Federal and State tax credits. If the purchasing entity does not pay Federal or State taxes then Blue Energy Fuels offers the leasing program described above which allows BEF to pass some of the savings provided by the Federal and State tax credits on to the purchasing entity. A capital lease is available which would transfer the ownership of the equipment to the city/schools system at the end of the lease, or have a buy-out option at the end of each year. BEF would price the equipment at fair market value.