US Senate tax bill complicates renewable energy

The US Senate made two last-minute changes in a massive tax-cut bill yesterday that could prove harmful to renewable energy.

Senate leaders rewrote the bill December 1 in a scramble to win over Republican Senators and make the math work under Senate budget rules before the bill passed early on December 2.

Corporate minimum tax

One change would move most US corporations from the regular corporate income tax to the alternative minimum tax.

Not all tax credits can be used against the minimum tax, and depreciation must be calculated more slowly.

The US has essentially two corporate income taxes. US companies calculate regular taxes at a 35% rate and then compare the amount to what they would have to pay at a 20% rate on a broader tax base. They pay whichever amount is greater.

Both the Senate and House tax bills reduce the regular corporate tax rate to 20%.

If both the regular tax rate and the minimum tax rate are 20%, then corporations will have to pay minimum taxes.

Investment tax credits can be used against minimum taxes. Investment tax credits are claimed on solar projects.

Production tax credits can be used to reduce minimum taxes for only the first four years after a project is originally placed in service. Production tax credits run today on the first 10 years of electricity output from a new project. They are claimed on wind, geothermal, biomass, landfill gas, incremental hydroelectric and ocean energy projects. The change would have the effect of truncating the credit period to four years. It would apply to existing projects.

This may cause developers to switch to investment tax credits on new projects. Developers have the option currently on any new project that qualifies for production tax credits to claim an investment tax credit instead when the project is first put in service.

Production tax credits are also being claimed today on refined coal facilities, but all such facilities had to be in service by December 2011 to qualify. The bill would cut short any such remaining tax credits.

The Senate bill would not reduce the corporate tax rate to 20% until 2019. The House bill would reduce it starting in 2018. Thus, 2018 tax credits would not be affected if the rate change is delayed until 2019.

Depreciation is taken slightly more slowly under the minimum tax. Wind and solar projects are depreciated for regular tax purposes largely over five years using the 200% declining-balance method. The 150% declining-balance method must be used for minimum tax purposes.

BEAT

The Senate also made last-minute changes to a base erosion and anti-abuse tax, called BEAT, that the renewable energy industry fears could reduce the supply of tax equity.

The Senate bill would impose a base erosion tax on large companies that use cross-border payments to reduce their US tax bills below 10% of US income after adding back cross-border payments to affiliates. An example of such a payment is interest on an intercompany loan or a payment to a back office in India for services.

Large corporations making such payments would have to compare A to B. A is 10% of income with cross-border payments added back. B is the corporation's regular tax liability reduced by the tax credits to which it is entitled. If B is less than A, then the US government will collect the difference as a tax.

At the last minute, the Senate increased the tax rate in A on banks and securities dealers to 11%. The banks appear to have traded a higher tax rate for being spared from having to add back into income cross-border "qualified derivative payments" to affiliates.

The base erosion tax may make banks and other large tax equity investors reluctant to finance projects in ways that entitle them to tax credits, since every dollar of tax credit has the potential to create a gap between A and B. The BEAT calculation would have to be made at the end of each year. A tax equity investor will not know when it invests whether it will receive the tax credits on which it is counting. Tax credits in existing tax equity financings could also be at risk. The tax would take effect in 2018.

Next steps

The House passed a different version of the bill on November 16.

The House would eliminate the corporate minimum tax as did the original Senate bill. The Senate had to restore the minimum tax to plug a $40 billion revenue gap.

There is no base erosion tax in the House bill. It would impose a 20% excise tax on some cross-border payments instead.

These and other differences will have to be ironed out in negotiations between the two houses and then a single bill sent back to both houses for another vote. The House is expected to name "conferees" on Monday. Republican leaders are eager to finish work on the bill by December 22, the earliest date on which the new Senator elected in the Alabama special election could take his seat, for fear that any new Senator will vote against the bill. Congress will be under pressure from the Trump administration to move more quickly.