Energy
Ken Makovsky
Wednesday, December 20, 2017Clean Energy Braces for Impact of Federal Tax Overhaul
Uncertainty reigns as Congress passes sweeping changes
As Congress passes the biggest changes to the federal tax code in decades, clean energy companies are wondering how the final bill will affect the unprecedented investments in renewable energy that we have seen over the past decade.
From the dramatic turnarounds in federal energy, climate and environmental policy including the withdrawal of the U.S. of the Paris Climate Accords, the renewed work on the Keystone XL pipeline and the elimination of the Clean Power Plan, the tax bill is just the latest uncertainty 2017 has brought to the clean energy sector
An analysis of the legislation from The Business Insider pointed to the following highlights:
- A less generous corporate rate cut.Republicans may cut the corporate rate to 21% from the current 35%, starting in 2018. The House and Senate versions had proposed a 20% rate.
- A lower top individual tax rate.The top individual bracket would drop to 37% from the current 39.6%. The Senate version had proposed a 38.5% rate.
- Repeal the corporate alternative minimum tax (ATM).The corporate AMT in the Senate version was a sore spot for many companies because it would have negated the effects of many popular deductions and credits, such as the research and development credit.
Perhaps most troubling to the clean energy industry was the inclusion of the Base Erosion Anti-Abuse Tax (BEAT) provision, which could prevent them from monetizing tax credits.
The American Council on Renewable Energy which consists of the American Wind Energy Association, the American Conservation Coalition, Citizens for Responsible Energy Solutions, the Conservative Energy Network and Conservatives for Clean Energy weighed in on their concerns with a joint statement issued on Dec. 15th.
“We are grateful for the elimination of provisions that would have decimated future renewable energy growth and even penalized past investment in wind and solar power, but we remain concerned about the potential impacts of the new BEAT provision on renewable energy finance. Even as we recognize that important progress was made in the effort to repair those provisions, we also note that the repair does not cover the full duration of the wind production tax credit (PTC) and the applicability of the new tax was expanded by conferees.
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. 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 the 80 percent repair applies only through 2025, and therefore devalues the later years of the 10-year wind PTC. In addition, 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 usable in any given year.”
So in the face of such uncertainty, how does a renewable energy company plan ahead for 2018?
An October report on federal tax reform from the American Council on Capital Formation offers a positive outlook in stating that higher rates of investment across the board (from lower corporate tax rates) would speed the adoption of new technologies, including clean energy technologies, and lower tax rates on returns to investment would improve the economics of replacing older equipment.
“Although lower tax rates diminish the value of expensing over normal depreciation and extending expensing to all investment would remove a tax preference now available only to R&D, those potentially negative effects of tax reform cannot be as large as the direct positive effects of lower rates.”
- David Montgomery, the report’s author, said that no matter what the final bill looks like, there is reason to be optimistic.
“The tax reform plan recognizes the importance of research and development to the American economy and singles out business credits for R&D as one of the few that should be preserved in the overall tax reform effort.”
While the overall effect on renewable energy projects and finance is unclear at this point, one thing is clear from the new legislation: that attorneys, accountants, lenders and developers will be very busy in 2018 trying to figure out the new landscape.
Andy Beck is executive vice president of Makovsky’s energy, manufacturing and sustainability practice, and general manager of Makovsky’s Washington, D.C., office. Previously, Andy served as the director of public affairs for the U.S. Department of Energy.
