On February 12, 2018, the Trump administration released an extensive infrastructure proposal that would increase U.S. federal infrastructure funding and incentives, provide state and local authorities greater discretion over infrastructure investments, and encourage cooperation between state and local governments and the private sector in developing and operating infrastructure projects. If enacted, these proposals likely would produce increased opportunities for private companies, both foreign and domestic, to participate in U.S. infrastructure projects. When private companies enter into contractual agreements with state and local governments for the development and/or operation of infrastructure projects, the arrangements commonly are referred to as “public-private partnerships” (“PPPs”). Private investors, including individuals, partnerships, or companies (hereinafter “private companies”) that enter into PPPs must navigate a host of U.S. federal tax issues. As a result, careful consideration of the tax issues and opportunities available is critical. This alert provides a general overview of certain issues that private parties may encounter when entering into a PPP.

Characterizing the Arrangement and Cost Recovery -

As an initial matter, private parties must decide how to characterize a PPP for U.S. federal tax purposes. Tax consequences vary significantly depending on a PPP’s tax characterization. PPPs may vary dramatically in their contractual terms, and such terms can impact their tax characterizations. Often, a PPP involves some form of payment by a private company to a governmental agency in exchange for certain rights, such as a long-term lease of existing real property improvements (e.g., a highway) and underlying land, or a franchise to operate infrastructure (e.g., the right to collect tolls). A private party might also make ongoing payments to the agency for the right to operate the infrastructure facility.