President Trump’s tax plan entitled ‘Unified Framework for Fixing Our Broken Tax Code’ contains certain proposals which are likely to impact P3 projects. It is his proposals to reduce the corporate income tax rate to 20% and abolish corporate Alternative Minimum Tax (AMT) which are likely to have the most significant impact on US P3 projects. However, his proposal that passthrough entities pay tax at a maximum tax rate of 25% might also impact the structures used in P3 Projects.

This is because in a number of P3 projects, the main source of revenue is from milestone and/or availability payments. Where this is the case, Section 460 of the US tax code is applicable and therefore taxable income is calculated using the percentage completion method (PCM).

Under the PCM, the entity would first calculate the expected profit as the contract price minus the contract costs and then allocate this expected profit over the construction period based on the percentage of the contract completed in the tax year. As a result of profit being recognised during the construction period, AMT is often payable in the earlier years of P3 projects.

In this blog we focus on certain modelling issues that we encounter relating to Section 460 assets and AMT. We also detail some other tax issues that will typically need consideration in financial models.These are:

Section 460 tax assets

Typically the PCM under Section 460 is well modelled, but there are a few inconsistencies that we discuss below.


What are contract costs?
Contract costs include both indirect and direct costs related to the contract and therefore include interest and fees, Special Purpose Vehicle (SPV) running costs, development/upfront transaction costs and any maintenance costs (if applicable) as well as the main construction costs. They do not include the costs of unsuccessful bids.

How should the contract price be calculated?
This should equal what the entity reasonably expects to receive under the contract during the construction period. A common assumption is the force majeure basis. This includes any construction period availability payments, milestone payments, outstanding debt balances and the capital injected balance at the end of the modelled period. With force majeure, the procuring body would need to put the entity back into the position that it would have been in had it not entered into the contract. The procuring body would therefore need to enable the entity to pay off any outstanding debt balances and repay any capital investors had injected into the project.

Inconsistencies in financial models

What amount is treated as being repayable to investors?
There is sometimes inconsistent treatment in financial models with some assuming that investors would only be repaid any capital invested whilst others assume that investors would need to be repaid the present value of any forecast dividends during the concession period as well as the present value of capital invested based on the forecast redemption date. The argument for the latter is that were the contract to be terminated due to force majeure, the reasonable expectations of dividends and return of capital would have been foregone. The argument for the former is that were the contract to be terminated due to force majeure, the aim is to put the investor back into the position that they would have been in at that point if the contract had not been terminated.

Should a margin be modelled on construction period maintenance services?
Where the contract involves an element of maintenance services as well as new construction, some financial models include a mark-up of between 1% and 5% on the estimated maintenance costs incurred during the construction period whilst others do not. The mark-up is added on the basis that maintenance services are being provided as part of the contract and a third party maintenance firm would probably charge a mark-up for the services they provide. However, some models do not add a mark-up on the basis that the concession has not progressed sufficiently for the SPV to be sure of making the profit it is forecast to make over the length of the concession and therefore to recognise a profit on one element of the concession agreement would be premature.

Unfortunately, the Section 460 legislation is not sufficiently detailed to determine how the amount repayable to investors should definitively be calculated and whether a margin should be calculated on any maintenance costs incurred during the construction phase.

Whether a mark-up on maintenance costs and/or the present value of future forecast dividend payments are included in the calculated contract price should only impact on the timing of when profit from the concession agreement is recognised for tax purposes and not the overall profit recognised. This is because the straight line amortisation of the contract price is an allowable deduction for tax purposes during the operating phase of the concession. As a result, if either a maintenance costs margin and/or the present value of future dividends are included in the calculation of the contract price, whilst the profit recognised during the construction phase will increase (contract price less contract costs will be higher), the profit recognised during the operating phase will decrease because the amortisation deduction will be increased by the same amount as the construction period profit is increased.

Alternative Minimum Tax (AMT)

Although President Trump announced he wants to abolish it as part of his tax plan, AMT is likely to continue to have an impact on P3 projects in the near future, particularly in the early years of projects.

The main adjustment to regular taxable income relevant to P3 projects is typically adding back Modified Accelerated Cost Recovery System (MACRS) reducing balance depreciation under the general depreciation system and replacing this with MACRS depreciation under the alternative depreciation system. This less generous straight line depreciation leads to higher adjusted taxable income particularly in the early periods of the concession when accelerated declining balance depreciation is taken on the highest tax balances. This could lead to AMT being payable in periods when corporate income tax is not. Alternatively, there might still be a taxable loss for AMT purposes.

Using AMT credits
AMT is payable at a rate of 20% on the adjusted taxable income with any AMT payable being added to an AMT credit pool which can then be used in tax years where normal federal corporate income tax is payable.

An error occasionally seen in financial models is to assume that an AMT credit can be used to fully offset the federal tax liability for the modelled period as long as there is enough AMT credit available. However, any unutilised AMT credit can only reduce the federal tax liability down to the calculated AMT liability for that period.

AMT losses
For AMT purposes, a maximum of 90% of the Alternative Minimum Taxable Income (AMTI) can be offset using AMT tax losses in any given year. This will mean that AMT will always be payable on at least 10% of the AMTI at a rate of 20%. This is therefore sometimes referred to as the 2% tax.

Some financial models incorrectly assume that AMT is payable at 20% on 10% of AMTI (90% being exempt). As a result, if there are available AMT losses, they assume that these can be used to fully offset AMTI. However, it is the use of AMT losses that may result in 90% of AMTI not being taxed rather than it being the case that 90% of AMTI is exempt.

Other tax issues to consider in US P3 projects

Implications of project entity structure
Many P3 project entities are structured as Delaware Limited Liability Companies (LLCs). Unless members of a Delaware LLC elect to “check-the-box” to be taxed as a C-Corp or S-Corp, they will be taxed on their allocated share of the LLC’s taxable income for the year even if there is no actual cash distribution received (“deemed distributions”).

Since tax is not payable at project entity level but is instead payable by members of the LLC, tax should not be shown within the project entity’s financial statements included in the financial model. However, in a memorandum sheet, financial models will usually still calculate tax payable on the project’s forecast taxable profits so that the members can assess their post-tax return from the project.

Tax base for Federal and State Tax
Financial models often assume that taxable income for state tax purposes is the same as for federal tax purposes and in many states the rules for calculating taxable income each period are similar to federal tax legislation. However, in a number of states there are more significant differences. For example, California does not follow federal tax depreciation rules for corporations, except to the extent that depreciation is passed through from a partnership or LLC classified as a partnership.

In addition, whilst state tax incurred is deductible for federal tax purposes, most states do not allow federal tax or tax incurred in other states to be deducted for state tax purposes. Some exceptions are Colorado, Illinois and Iowa, which allow other states’ taxes to be deducted and Iowa, Louisiana and Alabama, which allow federal tax to be deducted.

Financial models may need to have a completely separate state tax calculation (if the differences are significant), or a separate state tax calculation which starts from federal taxable income and then makes applicable adjustments (if differences are less substantial).

Commercial Activity Tax (CAT) in Ohio

For projects based in Ohio, CAT is payable when taxable gross revenue is greater than $1 million at a rate of 0.26% on the taxable gross revenue above $1 million made in Ohio. In addition, an absolute amount of annual minimum tax is payable depending on the level of gross revenue. Financial models relating to projects in Ohio should consider these taxes and reflect them as appropriate.

Sales tax on construction contracts
Sales tax is generally chargeable on tangible personal property but sales of real property are not generally subject to sales tax in any state. Construction materials such as bricks lose identity once incorporated into real property. Whilst construction contractors do not charge sales tax on the construction services they provide, they are likely to pay sales tax on the raw materials they use.

The sales tax incurred by contractors will be passed on to the project entity modelled and therefore construction costs input into financial models are likely to be inclusive of any sales tax incurred and there is no need to model any additional sales tax.


US P3 projects typically involve a number of challenging tax issues both at federal and state level covering direct taxes such as income tax as well as indirect taxes such as sales tax. The proposals contained in President Trump’s tax plan to abolish corporate AMT and cut the corporate income tax rate to 20%, if brought into law, would be additional considerations given that they would have an impact on P3 projects. Once more details are announced, financial models will need to reflect them in order to assess the overall impact of the proposals on parties involved in P3 transactions.

If you have any questions regarding the above or would like to speak to someone at Operis about potential tax issues arising in US P3 projects, please don’t hesitate to get in touch.

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