On November 2, 2017, the House Republicans released their plan for comprehensive tax reform, the “Tax Cuts and Jobs Act of 2017” (H.R. 1) (the “Tax Reform Bill”). Prior to this release, Congressional Republicans and the Trump Administration had provided few concrete details of their tax reform plans, including whether adjustments, if any, would be made to current tax credit regimes for energy investments. As discussed below, the Tax Reform Bill modifies, but keeps in place, the production tax credit (“PTC”) and the investment tax credit (“ITC”) for energy investments. The Tax Reform Bill also reduces tax rates for businesses and individuals, provides for immediate expensing for certain capital expenditures and limits the deduction for interest expense for most businesses. All of these provisions should have an effect on energy investments if the Tax Reform Bill is enacted in its current form.
Elimination of Inflation Adjustments for PTCs
Under current law, the PTC is available for the production of electricity from certain qualified energy facilities (including wind, biomass, geothermal, solar and hydroelectric facilities) during the 10-year period beginning on the date the facility was placed in service. With the exception of wind facilities (for which the PTC is available for facilities beginning construction before 2020), qualified energy facilities that began construction after 2016 are not eligible for the PTC. The PTC is a per-kilowatt-hour credit that currently adjusts for inflation; the base amount of the credit is 1.5 cents per KWH, but inflation adjustments have increased that credit to 2.3 cents per KWH for 2016. The Tax Reform Bill would eliminate the inflation adjustment (reducing the PTC to the base amount of 1.5 cents per KWH) for facilities for which construction begins after the date of enactment. The bill also clarifies that construction cannot be treated as beginning before a date unless there is a “continuous program of construction” that begins before such date and concludes on the placed in service date. This provision is expected to increase revenues by $12.3 billion over the 10-year budget window.
Modifications of Phase-Outs for ITCs
Under current law, the ITC is available for a percentage of the basis of eligible energy property, including solar, geothermal and wind energy property, but the credits phase out for new construction over different horizons:
|Property Type||2016||2017||2018||2019||2020||2021||2022 and Future Years|
|Fuel Cells & Small Wind||30%||0%||0%||0%||0%||0%||0%|
|Geothermal Heat Pumps, Microturbines & Heat and Power Systems||10%||0%||0%||0%||0%||0%||0%|
The Tax Reform Bill would alter the expiration and phase-out schedules for all qualified energy properties to the following:
|Property Type||2017||2018||2019||2020||2021||2022-2027||Future Years|
|Fuel Cells & Small Wind||30%||30%||30%||26%||22%||0%||0%|
|Geothermal Heat Pumps, Microturbines & Heat and Power Systems||10%||10%||10%||10%||10%||0%||0%|
As shown in the table above, the ITC is completely phased out for all properties by 2027. The determination of when construction begins would be clarified in the same manner as the PTC discussed above. These changes are estimated to reduce revenues by $1.2 billion over the 10-year budget window.
General Business Tax Provisions Relevant to Energy Investments
The Tax Reform Bill would reduce tax rates on the net income of corporations to 20 percent and on partnerships and other pass-through entities to 25 percent, but would eliminate certain credits and deductions, and would limit somewhat the deduction of net operating losses.
The Tax Reform Bill also would provide immediate and automatic full expensing of certain qualified property. Under current law, certain tangible personal property placed in service before 2020 (or 2021 in the case of certain property with a longer production period) is eligible for additional depreciation equal to 50 percent of the adjusted basis of such property. Energy property eligible for such additional depreciation includes energy property of the types eligible for the ITC (subject to a basis reduction if an ITC is claimed), as well as certain biomass and hydrokinetic property. Under the Tax Reform Bill, most businesses would be able to deduct 100 percent of the cost of such qualified property, provided that such property is placed in service after September 27, 2017 and before January 1, 2023 (with an additional year added for certain property with a longer production period).
The Tax Reform Bill also would limit the deduction for interest expense of all but certain businesses to the extent that it exceeds 30 percent of the business’s adjusted taxable income, with disallowed amounts carried forward for the following five years.
Effects of Proposed Tax Reform on Renewable Energy Investments
Notwithstanding that renewable energy credits survive under the Tax Reform Bill, the reduction in corporate and certain individual income tax rates, coupled with accelerated business expensing, likely will reduce the value of these credits for tax equity investors, as potential investors will have less overall tax to offset with credits. This could reduce the number of investors and thus increase the before-tax yield demanded by remaining investors. A reduction in the value of energy tax credits may not be offset by immediately expensing energy investments, because while immediate expensing would accelerate the tax deduction available from the expense, the deduction would serve to reduce taxable income against which a lower tax rate now applies, potentially reducing their effectiveness.
Even as details surrounding tax reform begin to take shape, there are open questions as to the likelihood that this legislation will be enacted. As the current US tax regime is a driver of tax equity investment, potential investors will need to gauge the likelihood that tax reform similar to the Tax Reform Bill will be enacted in order to determine the negative effect, if any, that such changes will have on their investment.
 The Ways and Means Committee explanation lists the date as November 2, 2017, but this date does not appear in the text of the Tax Reform Bill.
 If qualified fuel cell property or qualified small wind property, the construction of which begins before 2022, is not placed in service before 2024, the credit is reduced to 10 percent.
 Generally, this includes property with a recovery period of 20 years or less under the modified accelerated cost recovery system.
 Small businesses (businesses with average gross receipts of $25 million or less) would be excluded from the full expensing provision.
 Small businesses, public utilities and real property trade or businesses would be excluded from the full expensing provision.
 For this purpose, adjusted taxable income is the business’s taxable income computed without regard to interest expense, interest income, net operating losses, and depreciation, amortization and depletion.
 The limitation would be determined at the level of the tax filer – the corporation or, in the case of a partnership or pass-through entity, at the partnership or entity level.