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Legal Update

Senate’s Tax Bill’s Impact on the Tax Equity Market: Five Differences from the House Bill

5 December 2017
Mayer Brown Legal Update

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.

Corporate Tax Rate

Second, the Senate bill delays the reduction of the corporate tax rate to 20% until tax years starting after 2018. That means another year for which tax equity investors would value depreciation deductions based on a 35% tax rate and calculate their tax appetite using a 35% tax rate. So on the margin this is a positive for tax equity. In contrast, under the House bill, the 20% corporate tax rate starts in 2018.

President Donald Trump on December 2 told reporters that he would be open to a 22% corporate tax rate. That would be incrementally beneficial for new projects and new tax equity investments versus a 20% corporate tax rate. 

Given the president’s receptiveness to up to a 22% corporate tax rate, we expect that the rate may be raised to 21 or 22% and may be effective in 2018 (as the delay until 2019 would no longer be necessary from a tax revenue perspective).


Third, the Senate bill, like the House bill, provides for “expensing” or 100% immediate depreciation. However, the expensing provision is not permanent in the Senate bill as it is in the House bill. Rather, expensing under the Senate bill would be available for property acquired starting on September 27, 2017, and then would phase down by 20% a year for property placed in service after December 31, 2022, and before January 1, 2027.

Further, property eligible for expensing would not include “used” property under the Senate bill. The inclusion of used property as eligible for expensing in the House bill created an opportunity for investors that acquire operating projects, including repowered projects. That opportunity would not be available under the Senate bill.

If the Senate’s 2019 effective date for the decrease in the corporate tax rate is retained by the conference committee, it would create a tremendous incentive for taxpayers to acquire assets eligible for expensing in 2018 and deduct the cost at a 35% tax rate (rather than the 20% tax rate that would be effective in 2019). However, as discussed above, we do not view the corporate tax rate being effective in 2019 as a likely scenario if the rate is increased to 21 or 22%.

Nonetheless, lobbying for expensing for used property is not a priority for the wind and solar industries as it pales in comparison to protecting the availability of tax credits under current law and avoiding the application of BEAT (as discussed below).

Alternative Minimum Tax

Fourth, unlike the House bill, the Senate bill retains the alternative minimum tax (AMT) for both corporations and individuals. Fortunately, the investment tax credit is not an AMT “preference.” Further, production tax credits generated in the first four years of a project’s operation are not an AMT preference. Finally, bonus depreciation is not an AMT preference. It is not clear yet if expensing would be an AMT preference or not, but our guess is that like bonus depreciation, it would not be, as both would arise under section 168(k) of the Internal Revenue Code (Code).

The way the AMT works is that taxpayers pay the higher of their regular tax liability and their AMT liability. Under in the Senate and House bills, a corporation’s regular tax liability would be determined using a 20% tax rate (rather than the current 35%); however, that is the same as the 20% tax rate used to calculate AMT. Thus, if a corporation has any AMT “preferences” (i.e., tax benefits not permitted to be used in the AMT calculation), the corporation would end up paying AMT. Since production tax credits from projects more than four years old are an AMT preference, those credits would end up unable to be used for so long as the corporate regular tax rate and the AMT rate are each 20%.

Corporations receive a tax credit for the AMT they pay, and that tax credit can be carried forward indefinitely and applied against their regular tax liability once they exit AMT. Therefore, corporations would not lose their production tax credits from more than four-year-old wind projects so long as they manage to eventually exit AMT.

Fortunately, the issues with the corporate AMT and a 20% tax rate impact many industries, including oil and gas, real estate and banking; therefore, there is a broad constituency working to address this issue. Those efforts already are gaining traction as we understand that a proposal to lower the AMT rate to 15% or less is already being given serious consideration on Capitol Hill. Because 15% percent still sounds a little high with the regular corporate tax rate being 35% and the AMT rate being 20% under current law, to maintain that ratio suggests that the AMT rate should be approximately 11%.

Another possible outcome is that the corporate tax rate is raised to 21 or 22%, and that raises sufficient revenue to allow the corporate AMT to be eliminated, as was done in the House bill.

It seems likely that the AMT problem will be addressed legislatively in one manner or another. If it is not, it is generally unheard of for tax equity investors to have an indemnity or flip protection for AMT; therefore, for existing production tax credit partnerships the AMT impact would be borne solely by tax equity investors.


Finally and most importantly, the Senate bill contains the base erosion anti-abuse tax (BEAT), which the House bill does not. BEAT appears to be the biggest threat to tax equity investors with a foreign parent. BEAT, in theory, could be a problem for US-owned tax equity investors, but it remains to be seen as to how large a problem that would be.

BEAT is extremely complicated. Here’s how it operates at a high level:

  1. Does the corporation have more than $500 million of gross receipts for the tax year?
  2. Are 4% or more of the corporation’s deductions attributable to payments to foreign affiliates or depreciation of property acquired from a foreign affiliate?
  3. If the answers to both items 1 and 2 are “yes,” then the corporation must determine if it is subject to BEAT by following steps 4-6 below.
  4. The corporation calculates its “regular tax liability” for the taxable year.
  5. The corporation calculates BEAT. That calculation is the same as the standard income tax calculation but with four key changes:
    (a) there is no deduction for payments to foreign affiliates (other than (i) derivative contracts entered into by a taxpayer that is a bank and (ii) payments subject to US withholding tax);
    (b) there is no deduction for depreciation for property purchased from a foreign affiliate;
    (c) prior to 2026, the only “general business credit” allowed is the research and development tax credit (i.e., the investment tax credit, the production tax credit, the low income housing tax credit, the rehabilitation (historic) tax credit and the new market tax credit are not allowed (the “Monetization Tax Credits”)); and
    (d) the tax rate applied is only 10% (or 12.5% after 2025); however, in the case of a bank, the tax rate is 11% (or 13.5% after 2025).
  6. The corporation then pays the greater of its (i) “regular tax liability” and (ii) its BEAT liability.

That means that if the taxpayer pays BEAT prior to 2026, then it effectively received no tax benefit from any Monetization Tax Credits. For instance, if the taxpayer in 2019 has production tax credits from a wind project it invested in 2010 and is subject to the BEAT liability, then its 2019 production tax credits are effectively of no value to it. Further, it is unable to carry forward the 2019 production tax credits to use them in a future year, as such credits were used in the regular tax calculation and BEAT has no concept of carry forward of tax credits. Very few existing tax equity partnership or lease agreements would provide an indemnity, extension of the flip date or other protection for the tax equity investor due to the loss of use of tax credits resulting from  a change in law like BEAT.

Further, “regular tax liability” as the term is used for BEAT purposes does not include AMT. (See §§ 26(b)(1), (2)(A) of the Code.) Therefore, if a corporation owes more tax under AMT than its regular tax liability, it has to pay that excess. Then if the corporation owes more tax under BEAT than it does under regular tax, it has to pay that excess, too. This means there is further pressure to eliminate either BEAT or the corporate AMT in the conference committee.

Most tax equity investors have gross receipts of more than $500 million. That leads to the question of how many tax equity investors (i) have annual deductible payments to (or depreciation from property purchased from) foreign affiliates (other than derivatives payments for banks) that are at least 4% of their total deductions and (ii) owe more tax under the BEAT calculation (with the10%/11% tax rate) then they do under their regular tax calculation.

There are three ways for the tax equity industry to avoid the BEAT: (i) BEAT is excluded from the reconciled bill produced by the conference committee; (ii) in conference BEAT is modified to allow the offset of the Monetization Tax Credits in all years; or (iii) few tax equity investors actually end up paying BEAT. However, clause (iii) is impossible for anyone other than the tax equity investors’ tax departments to determine. Further, the mere threat of BEAT could cause current or potential tax equity investors to shy away from transactions involving Monetization Tax Credits due to the threat that they could be subject to BEAT and lose the value of the Monetization Tax credits for tax years prior to 2026.


  • David K. Burton
    T +1 212 506 2525
  • Jeffrey G. Davis
    T +1 202 263 3390
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