Tax Equity Market in Potential Peril from Final Tax Reform Bill

As lawmakers prepare to vote on the final version of the much-anticipated U.S. tax reform bill that was released last week, the renewable energy industry is counting its wins, while wondering what the long-term effect of the bill on the industry will be.

Lawmakers have spent the past few weeks bringing the House and Senate versions of the bills together into one final version.

Many of the concerns raised over the House bill have been assuaged, as critical provisions with the potential to cause widespread damage to the renewables industry were left out of the final version. Top among those provisions is the phase out of the investment tax credit/production tax credit. The bipartisan deal that Congress reached in 2015 for those credits remains untouched.

What’s in the bill, however, has some people very concerned about the future of the tax equity market.

A provision in the Senate version of the bill for the Base Erosion and Anti-Abuse Tax (BEAT) made it through to the final bill, though modified. Gregory Jenner, partner at Stoel Rives, says it’s too early to understand exactly what the effect of the provision will be, but it could be very bad for the tax equity market.

“As it was drafted in the Senate bill, it was catastrophic. The thought was that as it came out of conference, it wasn’t a 100 percent victory, but it would be something we could live with,” he said. On second look, however, Jenner said stakeholders are concerned.

Multinational corporations and certain foreign corporations doing trade with the U.S. would be subject to BEAT, which is meant to keep companies in check when they are calculating reductions in their U.S. tax liability.

BEAT applies when the reduction of a company’s U.S. tax liability from cross-border payments falls below 10 percent of U.S. taxable income.

Jenner says that BEAT sets up a comparison between regular tax liability and the 10 percent threshold, and if the 10 percent BEAT calculation exceeds the regular tax liability, then the greater of the two applies.

“In calculating this 10 percent threshold, you can use 80 percent of your tax credits, whereas you use 100 percent of your tax credits in calculating your regular tax liability,” Jenner said. “It has the potential for eliminating the value of that 20 percent.”

According to Jenner, BEAT applies to the investor, not a tax equity transaction, so there are many calculations that determine whether any particular investor is subject to BEAT.

It’s situational, he said, adding that it’s not a situation for which companies can plan.

In a statement following the release of the final version of the bill, Gregory Wetstone, President and CEO of American Council on Renewable Energy, said that the organization is concerned about the potential impacts of BEAT on renewable energy finance.

“It will take some time to assess the statutory language and determine how the financial institutions that invest in wind and solar power, and play a central role in allowing developers to utilize tax credits, will respond,” Wetstone said. “Business tax credits, like those for wind and solar power, can now be used to offset up to 80 percent of the BEAT tax, but we are uncertain how the marketplace will react to the fact that more multi-national firms may now be covered by the BEAT, and tax credits may not all be useable in any given year.

Jenner said that BEAT could have an immediate effect on existing deals with investors.

“I can guarantee you that every tax equity deal out there is being scrutinized, whether it’s in place or otherwise,” he said. “This has thrown a hand grenade into the tax equity market.”

While all expectations are that the final version of the bill released last week will go forward unchanged, there is a possibility of last-minute updates.

Jenner said changes are not likely, however, because timing is a major factor at this point.

“If anything is changed at the last minute, you can imagine how much it is going to get scrutinized, and there would be people crying foul,” he said.

Lead image credit: CC0 Creative Commons | Pixabay

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Jennifer Delony, analyst for TransmissionHub, started her career as a B2B news editor in the local and long-distance telecommunications industries in the '90s. Jennifer began covering renewable energy issues at the local level in 2005 and covered U.S. and Canadian utility-scale wind energy as editor of North American Windpower magazine from 2006-2009. She also provides analysis for the oil and natural gas sectors as editor of Oilman Magazine.

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