Energy boost: Company leans on new tax incentive to fuel project
A Lancaster-based company sees an opportunity to aid distressed areas of Puerto Rico by investing in green energy through a tax break enacted by the Trump administration.
The company, Ocean Thermal Energy Corp. is planning to tap into a provision of the 2017 tax overhaul that encourages people to invest their capital gains in investment funds targeting projects in distressed areas of the U.S., known as opportunity zones.
About Ocean Thermal Energy Corp.
Stock: Traded over the counter on the U.S. OTCQB Market.
Ticker symbol: CPWR
52-week range: $0.037 to $2.25 (As of Oct. 11)
Other: The company had assets of $1.3 million and liabilities of $11.8 million, according to an annual report it filed in the spring with the U.S. Securities and Exchange Commission.
Ocean Thermal designs plants that draw energy from temperature differentials in the ocean and that can convert salt water into drinking water. It has built a plant in Hawaii, and it hopes to raise money for one in Puerto Rico, said Jeremy Feakins, Ocean Thermal’s chairman and CEO. The plant would provide energy for the island, while creating good, living-wage jobs for an area still working to recover from a 2017 hurricane.
“The whole opportunity zone idea is to find a way to invest funds into distressed communities,” Feakins said. “We want to replicate what we have done in Hawaii.”
While investors would be taking a risk, Feakins said, the long-term payoff could be worthwhile, especially with the tax break. Feakins said his company’s technology could be an integral part of the future market for green energy.
A new incentive
The federal Opportunity Zone Program was passed as part of the 2017 tax overhaul by the Trump administration. The program is intended to help economically distressed areas by offering additional tax incentives for development.
Some positives of the tax program, according to accounting experts, include the following:
- The program helps distressed communities.
- For investors, capital gains on a current investment can be deferred for years.
- There is no cap on the amount that can be invested in a qualified opportunity fund.
- A qualified fund can be created relatively easily through self-certification that involves filling out a form.
- Taxable capital gains invested in the fund can be reduced 10 percent after five years; after seven years, there is an additional 5 percent cut. That means that a $100,000 capital gain put into a fund would be taxed at $85,000 after seven years. By Dec. 31, 2026, taxes would have to be paid on that original investment but at the $85,000 level. However, after 10 years, the capital gain created by the opportunity fund would not be taxed.
Experts cautioned that the new law also has several potential downsides:
- The right investor will need to be someone who has a capital gain to begin with but then is willing to invest long-term in a real estate venture.
- They must do so within 180 days of getting the capital gain.
- Because it is a long-term investment, the potential for the tax laws to change before the full benefits are realized is increased. The investment assumes that a profit will be made. As with any investment, a profit is not guaranteed.
- The program targets distressed areas, which makes any investment that much riskier.
The first step, though, was to create a qualified opportunity zone fund, which would allow investors in the project to take advantage of the tax incentive. It works like this: investors with taxable capital gains can put a portion of those gains into the qualified fund and defer or reduce taxes, depending on how long they stay in the fund. The funds would invest the money in designated opportunity zones, which are mostly in urban and distressed areas.
Investors do not need to live, work or otherwise do business in the zones to take advantage of the tax breaks.
Because many of the zones are in distressed areas of inner cities, observers have noted that the ideal investor probably would be someone who wants the tax break but also believes in the underlying benefit to a city or town and is willing to take a risk.
“Giving back to the community becomes a part of this. That is a big part of it,” said Ryan Raffensperger, a CPA with Raffensperger, Martin & Finkenbiner in Gettysburg.
A qualified fund to raise money for Ocean Thermal’s Puerto Rico project has been established by JPF Venture Fund. JPF was founded by a group of investors including Feakins and the late Jim Greenberg, a York County attorney.
The fund also is eyeing an opportunity zone in the U.S. Virgin Islands, said Gill Lyons, a real estate agent and member of a board advising Ocean Thermal. Both sites are close to the deep ocean water needed for a plant, he said.
Overall, the tax incentive could be an asset for many communities, but the word is only starting to spread, Lyons said. “People need to become aware of it.”