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Senate Tax Proposal Provides Encouraging News for Wind

Senate Finance Committee Chairman Orrin Hatch recently released his Chairman’s Mark of the Tax Cuts and Jobs Act (Senate Proposal) in advance of the Senate Finance Committee markup scheduled to begin today. The Senate Proposal differs from the House version of the Tax Cuts and Jobs Act (House Proposal), which we discussed in our blog post here.

Key Points of the Senate Proposal:

  • The Senate Proposal is silent on renewable energy credits, preserving the current 2.4¢/kWh PTC for wind and the PTC and ITC expiration dates and phase-out schedules agreed to at the end of 2015 under the “Protecting Americans from Tax Hikes Act.” The House Proposal slashes the PTC to 1.5¢/kWh, removes the inflation adjustment and imposes a statutory continuous construction requirement that may eliminate the four year safe harbor that wind developers rely on under IRS guidance. The Senate Proposal would also keep in place the permanent 10% solar ITC that applies to projects that begin construction after 2021 or are placed in service after 2023.

  • The bad news is that Senate Proposal does not include the ITC extension for orphaned technologies (e.g., fiber optic solar, fuel cell, small wind, micro turbine, CHP, and thermal energy) that were left out of the 2015 extension but included in the House Proposal.

  • The Senate Proposal mirrors the House Proposal with respect to 100% bonus depreciation for property placed in service after September 27, 2017 and before January 1, 2023. In line with the House Proposal, the Senate Proposal eliminates the requirement that the property be “original use” property in the hands of the taxpayer to qualify for bonus depreciation. Given that most tax-equity investor’s investing in partnership-flips will not be able to take advantage of 100% bonus depreciation unless they agree to a large deficit restoration obligation, we anticipate that more investors will move to a sale-leaseback structure to take advantage of this benefit if it becomes law.

  • The Senate Proposal follows the House Proposal’s 20% corporate tax rate, but the tax cut does not start until 2019.

  • The Senate Proposal follows the House Proposal’s limit on interest deductions. Under the House Proposal, the amount of interest that can be deducted is generally limited to 30% of the business’s adjusted taxable income. In the case of partnerships, this limitation would apply at the entity level. Deductions that are disallowed would be carried forward up to 5 years. As we discussed in our blog post on the House Proposal, this limitation could have an adverse impact on back leveraged transactions, which developers use to reduce their cost of capital and free up cash to invest in new projects.

The Senate Proposal, if passed as-is, would have undoubtedly less of an effect on the renewable energy industry than then House Proposal. While the House Proposal would reduce the PTC, the Senate Proposal maintains the status quo for both the PTC and ITC. However, whether any of these proposals becomes law is anyone’s guess.

© 2017 Foley & Lardner LLP

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About this Author

John A. Eliason, Foley Lardner, Tax Lawyer, Energy Industry Attorney
Partner

John A. Eliason is a partner and business lawyer at Foley & Lardner LLP. He provides tax, legal, and business advice to financial institutions, equity investors, manufacturers, and project developers in the energy sector and is co-chair of the firm’s Energy Industry Team.

Mr. Eliason regularly represents clients participating in wind, solar, and other renewable energy transactions that rely on tax and other federal and state incentives such as investment tax credits, production tax credits, bonus depreciation, and other government incentive...

202.295.4100
David B. Weisblat, Foley Lardner, Transactional Tax Lawyer, Project Finance Attorney,
Of Counsel

David Weisblat is of counsel and a transactional tax lawyer with Foley & Lardner LLP focusing on federal and state tax issues arising in representing financial institutions, developers, utilities and other participants in energy, project finance and leveraged lease transactions. Mr. Weisblat regularly advises clients on renewable energy projects, including solar, wind and biomass projects. He is familiar with current tax equity structures with an emphasis on sale-leaseback and partnership-flip transactions and advises on utility, commercial and residential projects.

Mr. Weisblat also structures domestic and cross-border energy and project finance transactions of power plants, aircraft, rail equipment and infrastructure assets. He also advises on tax issues associated with climate change policies, including carbon trading. Additionally, Mr. Weisblat represents clients in tax audit and controversy proceedings and advises corporations on tax issues in bankruptcy and restructuring. 

202.295.4176
Tori Roessler, Foley Lardner Law Firm, Washington DC, Securities Law Attorney
Associate

Tori Roessler is an associate with Foley & Lardner LLP and a member of the Transactional & Securities Practice.

Ms. Roessler previously served as a summer associate with Foley at the firm’s Washington, DC office, where she participated in projects concerning mergers and acquisitions, securities law, and false claims act investigations. Prior to joining Foley, Ms. Roessler gained experience with several Birmingham-based law firms, where she served as a summer associate.

202-672-5498
Kurt R. Rempe, Foley Lardner, Energy, Tax Lawyer, Pipeline Industry
Associate

Kurt Rempe is an associate and business lawyer with Foley & Larder LLP where he focuses on energy and tax law. His experience includes representing clients in tax equity investments in renewable energy projects; and regulatory matters related to the electric, natural gas and oil pipeline industry. Mr. Rempe has electric experience in transmission service and interconnection agreements, power purchase agreements, open access requirements, market-based rates, qualifying facility certification, reliability rules, sales and acquisitions of electric generation assets,...

202.672.5326