Does New York's alternative fuels credit under Tax Law section 606(p) get reduced by nonqualified nonrecourse financing, or limited by the federal at-risk (IRC section 465) or passive activity loss (IRC section 469) rules?

Plain-English summary

Arthur J. Giglio, a CPA in Hartsdale, New York, asked the Department whether New York's alternative fuels credit under Tax Law § 606(p) could be cut back by financing or federal loss-limitation rules that commonly restrict tax benefits from leveraged equipment deals. The facts he described: a manufacturer of "clean fuel vehicle refueling property" sells one unit to a limited liability company (owned by New York individuals and taxed as a partnership), while a third party separately agrees to lease and use the unit once it's installed on the third party's premises. The LLC pays $600,000 for the equipment - $200,000 down plus a $400,000 interest-bearing nonrecourse note. For federal purposes, the LLC's members are only "at risk" (under IRC § 465) for $200,000, and any losses passed through to them would be treated as passive activity losses under IRC § 469.

The Department walked through Tax Law § 606(p), which allows a credit for electric vehicles, clean-fuel vehicle property, and clean-fuel vehicle refueling property placed in service during the year. For clean-fuel vehicle refueling property specifically, § 606(p)(4) sets the credit at 50% of the property's cost, provided the property is located in New York and a deduction is allowed for it under IRC § 179A. Section 606(p)(5)(B) borrows the IRC § 179A definitions of "clean-fuel vehicle property" and "clean-fuel vehicle refueling property." IRC § 179A itself allows a deduction equal to the property's cost (capped at $100,000 per location for refueling property), without referencing the at-risk or passive activity rules.

Because § 606(p) neither requires reducing the credit base for nonqualified nonrecourse financing nor cross-references anything resembling the at-risk limitation of IRC § 465 or the passive activity loss/credit limitation of IRC § 469, the Department concluded those federal limitations simply don't apply to the state credit. Applying the full $600,000 cost, the credit would equal $300,000 (50% of cost), assuming the taxpayer otherwise qualified for it. The Department expressly declined to opine on a separate question - whether the credit is available at all where the taxpayer claiming it (here, the LLC) is not the one actually using the equipment (here, the third-party lessee).

What this means for you

Businesses financing clean-fuel vehicle refueling property

If you're structuring a purchase of clean-fuel vehicle refueling property with a mix of cash and nonrecourse debt, New York's § 606(p) credit is computed on the full cost of the qualifying property - it is not reduced because part of the purchase price was financed on a nonrecourse basis, and it is not capped by how much you're "at risk" for under IRC § 465 or by passive activity loss limits under IRC § 469.

Accountants and tax professionals structuring leveraged clean-fuel deals

When advising on New York's alternative fuels credit, don't assume the federal at-risk or passive activity limitations that constrain other federal and state tax benefits carry over automatically - the Department found no statutory basis for importing them into § 606(p). That said, this opinion leaves open (and does not resolve) whether an entity that owns and finances the equipment, but does not itself use it, can claim the credit at all.

Common questions

Q: Does financing part of the purchase with a nonrecourse note reduce the New York alternative fuels credit?
A: No. The Department held that § 606(p) does not require the credit base to be reduced by the amount of nonqualified nonrecourse financing used to acquire the property.

Q: Do the federal at-risk rules (IRC § 465) limit the amount of the New York credit?
A: No. The Department found that § 606(p) contains no limitation similar to IRC § 465's at-risk rules, even though the LLC's members were only at risk for $200,000 of the $600,000 purchase price.

Q: Do the federal passive activity loss rules (IRC § 469) limit the credit?
A: No. The opinion states that § 606(p) contains no limitation comparable to IRC § 469's passive activity loss/credit rules, even though losses passed through to the LLC's members would be treated as passive activity losses for federal purposes.

Q: How much was the credit on the facts presented?
A: Based on the $600,000 cost of the qualifying clean-fuel vehicle refueling property, the credit under § 606(p)(4) would equal $300,000 (50% of cost), assuming the taxpayer otherwise qualified for it.

Q: Did the Department decide whether the LLC could claim the credit even though a third party actually uses the equipment?
A: No. The opinion expressly states it does not address whether the credit is allowable where the taxpayer claiming it is not the user of the equipment.

Citations and references

• Tax Law § 606(p)(1) - general alternative fuels credit for electric vehicles, clean-fuel vehicle property, and clean-fuel vehicle refueling property placed in service during the taxable year
• Tax Law § 606(p)(4) - credit for clean-fuel vehicle refueling property equal to 50% of the property's cost, if located in New York and eligible for an IRC § 179A deduction
• Tax Law § 606(p)(5)(B) - defines "clean-fuel vehicle property" and "clean-fuel vehicle refueling property" by reference to IRC § 179A(c) and (d)
• IRC § 179A - federal deduction for the cost of qualified clean-fuel vehicles and clean-fuel vehicle refueling property, including the $100,000-per-location cap for refueling property
• IRC § 465 - federal at-risk limitation, not incorporated into the section 606(p) credit
• IRC § 469 - federal passive activity loss/credit limitation, not incorporated into the section 606(p) credit

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a02_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(6)I
Income Tax
September 18, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I020424A

On April 24, 2002, a Petition for Advisory Opinion was received from Arthur J. Giglio, CPA,
250 East Hartsdale Avenue, Suite 34, Hartsdale, NY 10530.
The issue raised by Petitioner, Arthur J. Giglio, CPA, is whether the amount of the
alternative fuels credit allowed pursuant to section 606(p) of the Tax Law is subject to any
limitations or reductions based on the amount of the nonqualified nonrecourse financing with respect
to the applicable property, or the amounts “at risk” as defined in section 465 of the Internal Revenue
Code (IRC), or “passive activity” loss or credit as defined in section 469 of the IRC.
Petitioner submits the following facts as the basis for this Advisory Opinion.
A manufacturer of equipment which qualifies as “clean fuel vehicle refueling property”
under section 606(p)(4) of the Tax Law wishes to sell one unit of such equipment to a limited
liability company. The limited liability company is wholly owned by individual New York
taxpayers and is treated as a partnership for federal income tax purposes. Prior to such sale, a third
party enters into an agreement with the manufacturer to lease the unit from the manufacturer or its
transferee once the unit is placed in service on the third party’s premises. The limited liability
company then purchases the equipment from the manufacturer, subject to a lease, for $600,000,
consisting of a $200,000 down payment and an interest-bearing nonrecourse note in the amount of
$400,000. For federal income tax purposes, the aggregate amount at-risk under section 465 of the
IRC is $200,000, and any losses of the limited liability company reported by its members would be
treated as passive activity losses under section 469 of the IRC.
Applicable Law
Section 606(p) of the Tax Law contains the provisions for the alternative fuels credit, and
provides, in part:
(1) General. A taxpayer shall be allowed a credit, to be computed as
hereinafter provided, against the tax imposed by this article, for electric vehicles,
clean-fuel vehicle property and clean-fuel vehicle refueling property placed in
service during the taxable year. Provided, however, that the credit provided for by
this subsection with respect to electric vehicles shall not be allowed to a gas
corporation or an electric corporation as defined in subdivisions eleven and thirteen,
respectively, of section two of the public service law, or a gas and electric
corporation as described in section sixty-four of the public service law, where such
corporation is subject to the supervision of the department of public service.

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(4) Clean-fuel vehicle refueling property. The credit under this subsection
for clean-fuel vehicle refueling property shall equal fifty percent of the cost of any
such property.
(A) which is located in this state and
(B) for which a deduction is allowed under section one hundred
seventy-nine-A of the internal revenue code (determined without regard to the
limitations prescribed in paragraph two of subsection (b) of such section or the
election referred to in subsection (e) of such section with respect to section one
hundred seventy-nine of such code).
(5) Definitions.
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(B) The terms “clean-fuel vehicle property” and “clean-fuel vehicle refueling
property” mean any such property which is qualified within the meaning of
subsections (c) and (d), respectively, of section one hundred seventy-nine-A of the
internal revenue code.
Section 179A of the IRC contains a deduction for clean-fuel vehicles and certain refueling
property and provides, in part:
(a) Allowance of deduction.
(1) In general. There shall be allowed as a deduction an amount equal to
the cost of
(A) any qualified clean-fuel vehicle property, and
(B) any qualified clean-fuel vehicle refueling property.
The deduction under the preceding sentence with respect to any property
shall be allowed for the taxable year in which such property is placed in service.
(2) Incremental cost for certain vehicles. If a vehicle may be propelled by
both a clean-burning fuel and any other fuel, only the incremental cost of permitting
the use of the clean-burning fuel shall be taken into account.

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(b) Limitations.
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(2) Qualified clean-fuel vehicle refueling property.
(A) In general. The aggregate cost which may be taken into account under
subsection (a)(1)(B) with respect to qualified clean-fuel vehicle refueling property
placed in service during the taxable year at a location shall not exceed the excess (if
any) of
(i) $100,000, over
(ii) the aggregate amount taken into account under subsection (a)(1)(B) by
the taxpayer (or any related person or predecessor) with respect to property placed
in service at such location for all preceding taxable years.
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(d) Qualified clean-fuel vehicle refueling property defined. For purposes of
this section, the term “qualified clean-fuel vehicle refueling property” means any
property (not including a building and its structural components) if
(1) such property is of a character subject to the allowance for
depreciation,
(2) the original use of such property begins with the taxpayer, and
(3) such property is
(A) for the storage or dispensing of a clean-burning fuel into the fuel tank of
a motor vehicle propelled by such fuel, but only if the storage or dispensing of the
fuel is at a point where such fuel is delivered into the fuel tank of the motor vehicle,
or
(B) for the recharging of motor vehicles propelled by electricity, but only if
the property is located at the point where the motor vehicles are recharged.
Opinion
Section 606(p) of the Tax Law allows a credit against personal income tax for electric
vehicles, clean-fuel vehicle property and clean-fuel vehicle refueling property placed in service

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during the taxable year. Section 606(p) does not require that the credit base be reduced by the
amount of the nonqualified nonrecourse financing with respect to the property, and does not contain
any limitations similar to those contained in section 465 of the IRC respecting the amount at-risk
or contained in section 469 of the IRC respecting the amount of passive activity losses.
Therefore, based on the facts submitted by Petitioner, the amount of the alternative fuels
credit that would be allowed under section 606(p) of the Tax Law would be $300,000, assuming that
the taxpayer qualified for the credit. It should be noted that no opinion is expressed about whether
the credit would be allowable under the facts submitted by Petitioner where the taxpayer is not the
user of the equipment.

DATED: September 18, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.