The Stratton Report has published an interview with me that discusses the pending tax reform legislation: http://strattonreport.com/longforms/davidburtonmayerbrown/.
The US tax reform bill that the Senate passed on December 2, 2017—along partisan lines in a 51 to 49 vote—is a mixed bag for the tax equity market. The bill is now headed to the conference committee, consisting of House of Representative and Senate leaders, to be reconciled with the tax reform bill passed by the House on November 16.
Below we describe the five differences from the House bill that are of greatest significance to the renewable energy tax equity market. (See also our prior analysis of the ramifications for the tax equity market of the House bill.)
Amounts of and Eligibility for Tax Credits
First, the amount of renewable energy tax credits available and the rules for qualifying for those credits are unchanged from current law under the Senate bill. Specifically, the inflation adjustment that applies to production tax credits is left in place and the “start of construction” rules are unchanged. The fact that the Senate bill left these provision alone is positive for wind and solar, which are in the midst of a phase-out, for wind, and a phase-down, for solar.
However, the Senate bill also left alone the lapsed tax credits for the “orphaned” renewable energy technologies that were inadvertently omitted from the 2015 extension that benefited wind and solar. The orphaned renewable energy technologies are fuel cells, geothermal, biomass, combined heat and power, landfill gas, small wind, solar illumination, tidal power and incremental hydroelectric.
Proponents of those technologies may have more negative views of the Senate bill. There is still discussion of the tax credits for the orphaned technologies being included in an “extenders bill” to possibly be taken up after the tax reform process is over.…
Mayer Brown has launched its US Tax Reform Roadmap. The Roadmap includes a timeline of legislative events related to the current tax reform efforts and links to the documents that were passed, approved or introduced on those dates as well as links to Mayer Brown’s analysis regarding pertinent documents. It should be useful to…
Our article Proposed GOP Tax Reform Would Curtail Tax Incentives for Wind and Solar is available from North American WindPower (no subscription required). The article includes a discussion of the politics of the Senate passing tax reform and a discussion of market implications; however, the discussion of the specific changes to the Internal Revenue Code…
On Thursday, November 2, Republicans in the US House of Representatives released their proposed tax reform legislation, providing for massive alterations to tax law. The proposed legislation would trim tax benefits applicable to the wind and solar industries, while broadening the scope of the application of the “orphaned” energy tax credit. Further, it would eliminate the tax credit for electric vehicles starting in 2018. The proposed legislation is subject to further amendments and may not be enacted into final legislation.
Continuity of Construction. Pursuant to current law, the production tax credit (PTC) and investment tax credit (ITC) phase out over time, with the level of credit for which a renewable energy project qualifies being based on when the project began construction relative to various deadlines that determine the level of PTC or ITC. Under the proposed legislation, for any renewable energy project to qualify for a specific level of PTC or ITC, there would need to be continuous construction on such project from the deadline for the specific PTC or ITC level through the date the project is placed in service.
The concept of continuous construction does not exist in the current PTC and ITC provisions of the Tax Code. It was adopted by the IRS as an administrative matter in Notice 2013-29. However, the IRS later, under Notice 2016-31, created a safe harbor to enable projects to avoid application of the IRS’s “continuity” requirement. To qualify for the safe harbor, a project must be placed in service within four calendar years after the end of the calendar year in which construction began. The proposed legislation would effectively codify the continuity requirement and eliminate the safe harbor. Further, these changes appear to apply to all projects that have not been placed in service as of the date of enactment of the proposed legislation, regardless of whether construction of such projects began before enactment.…
Below are soundbites from panel discussions at Solar Power International in Las Vegas on September 11 and 12. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or recording.
The topics covered are: Tax Reform • Tax Equity Volume and Investor Mix • Tax Equity Structuring • Deficit Restoration Obligation Structuring and Senior Secured Debt in Partnership Flips • FMV Valuation Issues and Insurance • Community Solar • Community Choice Aggregators • Power Purchase Agreements • Residential and Community Solar Markets • State Policy • Department of Defense Procurement
ITC has already gone through tax reform and already has a transition rule in place. These arguments resonate pretty well with Republicans. — SEIA, Gov’t Relations
Anyone who tells you where we are now in this tax reform debate, is lying to you. — Boutique Investment Manager
Low likelihood of comprehensive tax reform in 2017. Chances for a tax cut are pretty good. Indemnification for a tax rate cut is built into these transactions. — Boutique Investment Manager
We are using a 25% corporate tax rate in most deals. The specifics depend on allocation of risk [of change in tax law] and [the financial strength of] the counterparty. We are more likely to put in less capital now and contribute more later if there is not a tax rate cut. — Commercial Bank, Head of Business Development Energy Investing
Not one size fits all. We use a 35% tax rate for 2017 and a lower rate for 2018 and beyond. In our deals, for federal tax rates we use between 25 and 30% [for 2018 and later]. If rate reduction doesn’t occur, we then fund more. It frightened me when Paul Ryan said he was aiming for a 22.5% tax rate. [This was before the Republican Big 6 released their proposal with a 20% corporate tax rate.] — Money Center Bank, Managing Director
We have very flexible solutions in place now to address tax rate reduction risk in deals. It is not the headache it was six months ago. — Boutique Accounting Firm, Director
Since corporations generally pay less than 35% in federal taxes now, and $1 of tax credit is $1 of tax credit, it remains to be seen what a lower rate really means [for the solar tax equity market]. — Boutique Investment Manager
The potential change in tax rate means the potential for a cash sweep, which means sponsors can raise less back leverage. — Commercial Bank, Head of Business Development Energy Investing.…
The American Wind Energy Association’s (AWEA) annual conference, WindPower, was held in Anaheim, California. Below are soundbites from panel discussions on May 24, 2017. The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity. Further, they are organized by topic, rather than appearing in the order in which they were said.
Each year WindPower seems to devote less space on its schedule to topics related to tax equity. This year there was only one panel that purported to address tax equity; it was a panel about tax reform. It also appeared that there were fewer conference attendees who work in the tax equity space.
“There’s lots of tax equity in the market today. Deals are getting done regardless of uncertainty [with respect to tax reform].” Managing Director of a Money Center Bank
“There’s so much tax equity capacity right now that should there be tax reform [with a reduction in the corporate tax rate] there should [still] be enough tax equity out there.” Managing Director of a Money Center Bank
“A lot of people are handicapping [tax reform] as rate reduction that is less severe than what’s in [any of the Republican] proposals.” Managing Director of a Money Center Bank
“Tax reform will have a negative net present value impact on projects’ economics. To maintain the same return level, sponsors will need to drive down costs or increase revenue. Revenues have been going down, but costs have been going down faster. If we can keep that up, [the wind industry] may be able to absorb the cost of a change in the corporate tax rate. Managing Director of a Money Center Bank
“The cost of tax law change will not be as high as some people have projected.” Managing Director of a Money Center Bank
“Our intelligence shows support [on Capitol Hill] for maintaining the PTC phase-out as it is today, but we don’t take that for granted.” SVP Federal Legislative Affairs of AWEA
“The general consensus among tax equity investors and sponsors is [any tax reform would include] minimal change to depreciation benefits and no change to the PTC phase-out.” Managing Director of a Money Center Bank
“For now, people are making [tax reform assumptions in financial models] and getting deals done, but that could change with more tax reform proposals. What the market wants is certainty.” Managing Director of a Money Center Bank…
On June 28, Mayer Brown and Alfa Energy Advisors presented the webinar Tax Structuring and Impact of Potential Tax Reform. An audio recording of the presentation with video of the slides is available here (the button is near the bottom of the page). A pdf file with just the slides is available here.
Below are the questions submitted by the webinar audience with answers:
1. Question: For solar projects that use a third-party investor to monetizes the tax benefits, what is the split between the use of a sale-leaseback, partnership flip or an inverted lease structure in the market today?
Answer: There is no published data on this question. An educated guess in the current market is that partnership flips are more than half the market, inverted leases are less than ten percent of the market with the remaining portion made up of sale-leasebacks.
2. Question: In today’s solar tax equity market, are time- or yield-based flips more prevalent?
Answer: Yield-based flips are more prevalent. However, one very large tax equity investor prefers time-based flips. A generalization is that solar tax equity investors that started in wind projects prefer yield-based flips as that is what is sanctioned in the safe harbor for wind projects in Revenue Procedure 2007-65, while investors that started in tax equity by investing in historic tax credits prefer time-based flips.…
Please join Mayer Brown and Alfa Energy Advisors for another session of our popular webinar addressing how tax reform could affect various tax equity structures, how the market is allocating tax reform risk between sponsors and tax equity investors.
Key Event Information
Date & Time
Wednesday, June 28, 2017
12:00 p.m. – 1:30 p.m. EDT
Register here for this complimentary webinar.
Topics to be covered in the seminar will include:
• Trends in the tax equity market
• Impact of potential tax reform on flip partnership structuring
o Wind PTC projects
o Solar ITC projects
o Earnings per share impact analysis
o Key takeaways
• Comparison of time- and yield-based partnership flip structures
• The IRS’s updated “start of construction” guidance for tax credit qualification
On May 11, 2017, Senators Edward J. Markey (D-Mass.) and Sheldon Whitehouse (D-R.I.) introduced the Offshore Wind Incentives for New Development Act or, simply, the Offshore WIND Act (here). The Offshore WIND Act would extend the 30% investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) for offshore wind through 2025.…