House and Senate Republicans released yesterday evening language of a comprehensive tax reform bill, the "Tax Cuts and Jobs Act" (H.R. 1), that is expected to be voted on next week and signed into law by President Trump by the end of the year. This version of the bill comes after two weeks of discussions among lawmakers to reconcile their different versions of a tax reform bill.
The bill should assuage many of the significant concerns about how tax legislation would impact the renewable energy industry, although the full impact of the final bill will not be known for some time.
Following is a summary of some of the more noteworthy energy-related provisions in the bill.
- Corporate rate and alternative minimum tax (AMT). The corporate income tax rate is reduced to 21% and the corporate AMT is eliminated. This negates the issue created by the Senate version of the bill, which effectively could have eliminated the availability of the PTC in certain circumstances.
- Inflation Adjustment for PTC. Under current law, the amount of the production tax credit (PTC) is adjusted annually for inflation. As we reported on November 2, 2017, the House bill would have eliminated inflation adjustments for certain facilities, thereby reducing the amount of the PTC for those facilities going forward. The conference bill released yesterday does not follow the House bill, and keeps intact the PTC inflation adjustment.
- Statutory Continuous Construction Requirement. The amount of the PTC or the investment tax credit (ITC) for a facility is based in part on the date construction of the facility begins. The House bill would have imposed a statutory requirement that a taxpayer maintain a "continuous program of construction" after construction begins to qualify. Under a safe harbor created by the current IRS guidance, a taxpayer is considered to have met this "continuity" requirement if the facility is placed in service within four years of the year in which construction begins. There was concern in the energy industry that the House bill would have eliminated this four-year safe harbor. The conference bill does not follow the House bill, and the current IRS guidance regarding the continuous construction requirements, including the four-year safe harbor, should remain in effect.
- Other House bill provisions that are not in the final bill. As we described here, the House bill would have enacted several other energy-related provisions, including: (a) phase out of the 10% solar ITC, (b) restoration of the ITC for certain other technologies, such as fuel cells and combined heat and power facilities, and (c) repeal of the enhanced oil recovery credit and credit for producing oil and gas from marginal wells. The conference bill does not include these provisions.
- 100% Expensing. For certain property placed in service or acquired by a taxpayer after September 27, 2017 and before January 1, 2023, the taxpayer will be entitled to immediately deduct ("expense") the entire cost basis of the asset, rather than depreciating that amount under the applicable cost recovery system. Qualifying property placed in service from January 1, 2023 through 2026 would qualify for 50% bonus depreciation.
- Interest deductibility. The conference bill contains complex provisions limiting the deductibility of certain business interest. These provisions likely will have an impact on financing for some renewable energy projects.
- Base Erosion Anti-Abuse Tax Provision. The Senate's version of the bill included a complex Base Erosion Anti-Abuse Tax (BEAT) provision designed to prevent erosion of the United States tax base through offshore earnings stripping transactions, and that BEAT provision is retained in modified form. These provisions could, depending on a taxpayer's particular circumstances, limit the taxpayer's ability to claim a portion of the ITC or PTC. The conference bill modifications should make the limitation less severe than it could have been under the original Senate version of the bill.
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