Tax Reform Goes to the President: How Did Renewables Fare?
On December 20, 2017, the U.S. House of Representatives voted to send the Tax Cuts and Jobs Act (the “Act”) to the president for his signature, which is the final step required to make the Act effective. What does the final bill mean for the renewable energy industry? The Investment Tax Credit (“ITC”) and the Production Tax Credit (“PTC”) appear to remain unchanged (for now) and the Base Erosion and Anti-Abuse Tax (aka, the BEAT or International AMT) in the final version of the Act is better for the renewables industry than in previous iterations. Nevertheless, a handful of other provisions may significantly impact the renewable energy industry.
But Investment in Renewable Projects May Soften, Especially by Multinational Banks
Assuming that the president signs the Act, the U.S. maximum federal corporate income tax rate will be reduced to 21%. This reduction will generally increase returns to investors on operating projects but will also generally reduce the value of the PTC and ITC in that investors will not need as many credits to reduce their final tax bill. In addition, the reduction may extend flip date calculations that do not assume a fixed income tax rate. While the Act will also eliminate the corporate alternative minimum tax, this change should not affect investor credit appetite.
The Act also brings back 100% bonus depreciation deductions — for a time. Although subject to certain restrictions, the new version of 100% bonus depreciation will be available for qualified property placed in service prior to 2023. Bonus depreciation will also be available at steadily reducing rates for qualified property placed in service through 2026. Like the reduced corporate income tax rate, bonus depreciation may increase returns to investors, but in the last several years, many of the larger investors have elected out of bonus depreciation, indicating that this provision may have limited effect in some portions of the renewables industry. In addition, the new limitations on net operating loss deductions may cause some investors to more carefully assess their appetite for depreciation deductions.
However, the Act also includes several provisions that may hurt some investors.