On December 22, 2017, the President signed into law tax reform legislation known as the “Tax Cuts & Jobs Act” (available here
). Broadly, the legislation lowers corporate tax rates and restructures personal income tax brackets while also impacting energy companies, state and local entities, and owners and issuers of tax exempt qualified bonds. Renewable energy entities such as solar, wind and geothermal producers will also be affected by the legislation.
The legislation maintains the status quo on investment tax credits (ITC) for solar projects for which the tax credit continues as scheduled in a previously agreed phaseout. The ITC was not extended for projects using combined heat and power, geothermal, fuel cells, and small wind. A separate bill was introduced in the Senate that would extend the ITC to these and other technologies. The ITC remains at 30% until 2022 with a plant in service date no later than January 1, 2024. After calendar year 2022, the ITC drops down to 10%. The ITC will not be available for solar projects if construction does not begin by December 31, 2027. The value of the production tax credit (PTC) for wind, solar, geothermal and closed-loop biomass has been maintained by keeping the inflation adjustment at the current rate of 2.3 cents/kWh, despite the earlier House version reducing it to 1.5 cents/kWh. The legislation also maintains the PTC availability in its current form and phases it out as scheduled by the end of 2019.
For nuclear generators, however, the tax legislation does not extend the advanced nuclear facilities tax credits that are currently scheduled to expire by December 31, 2020. An earlier version of the tax bill in the House had extended this credit indefinitely to the extent that there were unused tax credits up to a cap of 6,000 megawatts of national capacity from qualifying nuclear facilities. An extension of the nuclear tax credit would have been used to ensure that the Vogtle nuclear facility in Georgia, and the summer nuclear facility in South Carolina, progress toward completion. The separate tax extenders legislation that is currently pending in the Senate may also be the vehicle for the nuclear tax credit extension.
The final legislation added a new tax, the base erosion and anti-abuse tax (BEAT), to prevent companies from reducing their tax liability by transferring funds to foreign affiliates. For companies that utilize the ITC and PTC, such tax credit investments, which help to strip down their tax liability, might diminish in value if utilizing the credit pulls them into the new BEAT tax.
The final legislation rejects the House version’s elimination of the $7,500 credit for electric vehicles. This credit is often relied on by some pubic power utilities for their own operational fleet as well as for their customers’ participation in energy storage or time-of-use policies. For now, the tax credit for electric vehicles remains.
State and local entities can continue to rely on the tax exempt status of municipal bonds. However, the legislation eliminates the practice of advance refunding in which existing bonds that are coming due within 90 days can be paid off with the issuance of new bonds. State and local entities sometimes rely on advance refunding when new lower rates can be used to save on older debt that is coming due. The final legislation reverses an earlier House version that eliminated Private Activity Bonds (PABs), which are sometimes utilized by state and local governments to help private entities raise money for development projects. The legislation eliminates qualified tax credit bonds, which state and local governments often rely on to help finance projects such as school construction, energy conservation or renewable energy projects. Private bond holders rely on the federal tax credits in lieu of interest payments from state and local issuers, including Tribal governments and public power utilities. Under current law, interest on government bonds and other non-profit bonds may be included in adjusted corporate earnings and subject to alternative minimum tax (AMT) liability. The legislation eliminates the AMT for individuals and businesses. The legislation also provides for immediate, 100% expensing and cost recovery of expenses, for five years, for certain types of qualified property but which does not apply to regulated utilities. However, regulated utilities have been allowed to take a deduction of 100% on interest paid while other corporate entities are limited to 30% under the legislation. The 100% exemption, coupled with new lower corporate tax rates, will likely have a trickledown effect on cost-of-service based rates that regulated utilities can charge. Already, a handful of state utility commissions are seeking more information on how ratepayers will be affected by the new tax law.
Provisions in the tax legislation take effect on January 1, 2018. For more information on this and other Capitol Hill developments, please contact Jeffrey C. Genzer