Editor’s note: Early Saturday morning the U.S. Senate passed its tax reform package, which included a controversial provision which could greatly affect the market for tax equity financing. In this interview Gregory Jenner, a partner at renowned law firm Stoel Rives, gives further insight on what the BEAT provision could do, which he describes as a “hand grenade” in the middle of tax equity finance.
pv magazine: If the reconciled tax bill is passed with the BEAT provision included as it currently stands, what do you expect the effect to be on U.S. solar finance?
Gregory Jenner: It’s not going to be anything other than adverse. The question is how bad. And there is some uncertainty about that, because the provision will apply differently depending on who the tax equity investor is.
But it is inevitable that it will reduce the availability of tax equity. It is just unclear how much it will be reduced. So there is nothing good that will come from the BEAT provision for renewables.
pv magazine: If you had to give a portion of the amount of tax equity that you think will be shut off from this provision, what would your guess be?
Jenner: I can’t possibly give you that. Each investor is going to be affected differently, depending on their investments, their structure, and what they decide to do in response to that is unclear. I think it’s going to adverse and perhaps catastrophic.
pv magazine: What other provisions in the Senate tax bill would affect renewable energy finance?
Jenner: Well, of course the corporate tax rate in and of itself will potentially reduce the availability of tax equity, because it reduces the amount of tax that corporations are paying. In and of itself that is not a good thing. Then there was a last-minute hiccup, which I think was completely inadvertent, but which has had a temporary negative effect.
At the last minute, the Senate tax bill restored or didn’t repeal the corporate Alternative Minimum Tax (AMT). In other words they were going to repeal it, going to repeal it, and then they put it back or left it alone. Because they were reducing the regular tax to 20% and the corporate AMT, which was going to be zero, is back at 20%, but on a broader base and you can’t use tax credits – it has the effect of making the corporate AMT pretty much the tax base. And that would have shut off the use of Production Tax Credits (PTC).
You can’t use the PTC against the corporate AMT after four years. This last-minute change by putting the AMT back in, or leaving it alone, they temporarily stopped a number of deals from begin funded.
pv magazine: It is only for the PTC, or does it affect the ITC as well?
Jenner: It is only the PTC.
pv magazine: Assuming the BEAT provision and the drop to 20% get in, how soon will these changes be enacted in the tax code, and how soon do you expect them to have an effect – obviously other than the AMT matter – on renewable energy finance?
Jenner: The corporate tax rate cut is delayed a year, so that effect will be delayed. But at the same time these deals take a while to get done. So it is likely to have some effect immediately. It is going to have some weird effects because of the expensing provision, but I won’t even go into that.
The BEAT provision is effective in 2018 – immediately. That is a hand grenade right into the middle of tax equity financing. Its effect will be immediate and severe.
pv magazine: What do you expect to happen in process of reconciling the Senate bill with the House bill? What should we watch for?
Jenner: I expect a mad rush to get it done, without a lot of thought or a lot of analysis. At this point it is a runaway train. I don’t know whether or not they are going to announce these things ahead of time, or word will leak out. It is hard to know. But it is going to happen fast.
pv magazine: In the Senate there have been some champions for renewable energy, most prominently Chuck Grassley. Grassley is reported to have made several statements that he would do something about this BEAT provision. For any of the senators who wish to undo this – is there an opening for them to do this.
Jenner: I think so – there is an easy fix.
pv magazine: In the reconciliation process?
Jenner: Absolutely. The way the BEAT provision works, it only allows the use of one tax credit against the BEAT tax, and that is R&D. If you allow all of the incentive credits, then you fix the problem.
The fix is easy, but obviously there is some revenue loss associated with that. We will see. I think that this is unclear how they end up, and potentially devastating to the energy industry.
Interview conducted by Americas Editor Christian Roselund