Tax Reform and Renewable Energy

Will we have tax reform this year?  What form will it take? How will tax reform affect renewable energy investors and developers?  These are some of the questions that we have been grappling with since last November’s election.

The outlook for major tax reform appeared promising. With the Republicans in the majority in Congress (albeit by a slim majority) and a nominal Republican in the White House it appeared to most observers that major tax legislation would be enacted in 2017.  However, as we have seen over the past few weeks, health care legislation has stalled and it appears the momentum for passing new legislation may be sagging. 

Although some legislators have recently stated that tax reform is on their agenda for 2017, after such a brutal campaign to pass major legislation, it is unclear whether Congress will have the passion or energy to engage in another battle to write significant legislation.  

As we have seen from the proposals that have been circulated by Congress and the President, some of the potential goals of new legislation include:

1.       Lower corporate tax rates;

2.       Lower individual and compression of tax rates;

3.       Repeal of the alternative minimum tax;

4.       Reduction in individual tax rates for business income from flow through entities such as S corporations and partnerships;

5.       Immediate expensing of business equipment;

6.       Disallowance of net interest expense.

Given these potential fundamental changes in tax law, how will these affect the renewable energy developer and investor in a sector of the economy that has relied on federal tax credits and accelerated depreciation?

Even though credits reduce tax on a dollar for dollar basis (whereas deductions such as depreciation reduce tax by the tax rate), will lower corporate tax rates lead to less institutional investing as the credits will be less valuable? 

Should developers operate as C corporations rather than partnerships or will there actually be a bifurcated rate for flow through entity net income?

Will lower individual rates lead to less personal individual tax credit and deduction investing?

Will renewable energy tax credits be eliminated to raise revenue to offset some of the other major changes noted above (even though the credits are set to expire and are decreasing over the next few years)?

Due to the uncertainty whether tax legislation will be enacted or the form it will take, it is too early to determine if tax reform will have a negative impact on renewable energy industry, if at all. That said, Renewable Energy supporters need to be conscious that some of the circulated proposals could have a significant effect on the industry so should monitor potential legislation if and/or when it moves through Congress.

Please contact your Rodman team member if you have any questions and/or thoughts regarding this article.