Base Erosion and Anti-Abuse Tax creates new complexities for wind and solar energy investors.
Although the U.S. Congress did not change the federal production tax credit (PTC) and federal
investment tax credit (ITC) legislation for renewable energy projects in the Tax Cuts & Jobs Act, investors and project sponsors must now assess the impact of the new Base Erosion Anti-Abuse Tax (BEAT).
Impact on wind sector
Current federal income tax rules allow PTC-eligible wind projects to elect the ITC in lieu of the PTC. This technical legal limitation (which results from the ITC being based on project cost alone) explains why the wind sector in today’s market still prefers the PTC to the ITC in a wind deal, given a choice.
This is also affected by the trend towards falling costs coupled with increased wind production. The prolific output and increasing efficiency of modern wind turbine technology means that wind farm tax equity transactions that elect to claim the PTC commonly generate substantial amounts of the credit.
The new unknown created by the BEAT may increase the attractiveness of the ITC for some investors, but only if the ITC is not limited by the BEAT in the year it becomes available to the investor.
Impact on solar sector
Although the ITC for solar was also not directly altered by the new tax law, the primary impact on the solar sector also arises from the new tax accounting rules that independently affect the wind sector, namely the BEAT, overall corporate rate reduction, interest deduction limits and elimination of Alternative Minimum Tax.
To the extent that the BEAT renders an investment in a ten-year PTC tax credit stream less attractive, some renewable energy investors may judge that a solar ITC project could be a sufficiently more attractive investment than a wind PTC or a wind ITC project. This is because the tax equity investment cost of a solar ITC investment differs from the cost of a PTC investment whose credits are claimed annually over ten years.
Each investor will assess these investments differently, depending on how they estimate their BEAT liability, their time value of money calculation, total investment, holding period criteria, and other factors compared to a ten-year PTC investment.
The greater relative near-term certainty of the one-time, up-front solar ITC could make these investments attractive compared to the value of a PTC wind project or even a wind ITC investment.
Preliminary assessments of the impact of BEAT on tax equity were dire. However, apprehension appears to be waning as corporate treasurers and tax professionals become more familiar with the new BEAT rules, despite minimal guidance so far from the U.S. tax authorities.
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