Cost segregation in the Renewable Energy sector
Every complex investment should be professionally settled for tax and balance sheet purposes. This also applies to implemented RES projects, specifically wind and photovoltaic farms. The essence of cost segregation process lies in the separation of all fixed assets comprising a given investment, the determination of their tax and book value and the specification of the scope of components subject to property tax (PT). Cost segregation therefore assumes that the investment may be split into a number of different assets and excludes the simplified model of reporting the investment as a single fixed asset.
|Fixed assets depreciation||Possible application of higher depreciation rates|
|Property tax||Precise determination of the taxable structures and their tax base. In the case of investments located in several municipalities, determination of the tax base for each municipality.|
|Preparation of the investment for sale.||Transparent structure of fixed assets for due diligence on the part of the purchaser.|
|Inventory of the property||Precise identification of assets with indication of the value of the individual elements.|
|Real estate clause||In practice, it often turns out that following the cost segregation the entity does not meet the definition of a real estate company and the clause is not applicable.|
As a result of cost segregation, it is possible, among other things, to increase the amount of annual depreciation allowances (up to 1.5 times) or to reduce property tax (up to 3 times). The objective of determining the PT tax base of structures is particularly important from the perspective of the renewable energy sector. This is due to the significant amount of the burden of this tax on RES projects in the long run.
For the purpose of settlement, cost segregation takes into account all CapEx-type expenses, i.e. both those directly related to the construction process, as well as incidental expenses which, in light of the regulations and the practice of the tax authorities, can be capitalised to the initial value of fixed assets. The second basis for settlement is the detailed specification of works from contractors so as to have the basis for determining the value of each component of the investment. An investor may have to take adequate steps in advance in its relationship with the contractors to ensure that appropriate cost estimates or specifications are obtained.
Cost segregation should result in a detailed investment settlement containing ready information to be entered into the accounting system (fixed asset register). It is important that this data relates directly to the source data, which guarantees high transparency of the settlement, e.g. for the purposes of tax inspection or due diligence. To conclude, professional cost segregation not only ensures a high degree of fulfilment of tax and accounting (‘compliance’) obligations, but also leads to genuine savings of an investor as compared to a simplified settlement model.
Manager, tax advisor, MDDP
Last Updated on December 9, 2022 by Anastazja