United States: What Is The Impact Of Tax Reform On US Wind Tax Equity Deals?

A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals?  in its blog (subscription required) and newsletter.  If you are unable to open the blog post, the text of the article is available below:

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%

In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation

A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation.

For instance, assume a wind project costs $105m. The sponsor and tax equity investor form a partnership with contributions of $45m from the tax equity investors and $60m from the sponsor. The project has $5m in revenue from selling power in 2018 and $3m of production tax credits (PTCs).

The partnership can deduct the full $105m in 2018. That means the tax equity partnership has a $100m tax loss in 2018 (i.e. $5m of revenue less $105m of depreciation) that is allocated 99% to the tax equity investor and 1% to the sponsor. The tax equity investor only contributed $45m. Therefore, the "outside basis" rules mean the tax equity investor can take a deduction for only $45m, and the remaining $54m (i.e. $99m less $54m) is "suspended".

That "suspended loss" can be used in either of the following ways: (i) income is allocated to the tax equity investor in later years or (ii) the tax equity investor contributes additional capital.

Further, the 'capital account' rules mean that the equity investor must agree to a "deficit restoration obligation" whereby, if the partnership liquidates, the tax equity investor agrees to contribute $54m to the partnership. Although we are not aware of a wind partnership ever liquidating in a way to trigger payment on such an obligation, some tax equity investors have risk management constraints on how large an obligation they can agree to.

If, for instance, the tax equity investor was only permitted by its management to agree to a deficit restoration obligation equal to 60% of the capital it contributed (i.e. $27m, which is 60% of $45m), then it could be allocated only a $72m dollar loss (i.e. $45m of capital and $27m of deficit restoration obligation). That would mean the partnership could not elect 100% bonus deprecation. It would have to fall back to the 40% bonus depreciation available for projects acquired in 2018 prior to the enactment of tax reform. That would mean a $42m bonus depreciation loss and double declining balance depreciation over a five years on the remaining $63m.

Alternatively, the partnership could avoid bonus depreciation entirely and merely claim double declining balance depreciation over five years for the whole $105m.

The partners could opt to allocate less than 99% of the loss to the tax equity investor in 2018. For instance, the partnership could allocate 45% of the 2018 loss to the tax equity investor and avoid having a suspended loss or deficit restoration obligation. But that would mean that the tax equity investor would only be allocated 45% of the PTCs for 2018, so over $1.5m of the $3m in PTCs would be allocated to the sponsor. Wind sponsors for a variety of reasons typically do not have much use for tax benefits, so $1.5m of PTC value would be effectively lost.

Leasing Alternative?

The partnership rules could be avoided by the sponsor selling the project to the tax equity investor and leasing it back. However, in a lease structure, the PTC is not available.

An investment tax credit (ITC) equal to 30% of the tax basis of the project is available (assuming construction on the wind farm started before 2018) but, given improvements in wind turbine technology, the ITC amount for land-based projects is often less than the present value of the 10-year PTC stream. Therefore, sponsors are typically willing to wrestle with the partnership tax accounting rules in order to capture the PTC value.

PTC Inflation Adjustment: A Bullet Dodged

The version of tax reform initially passed by the House of Representatives would have removed the inflation adjustment from the PTC. For wind projects that started construction prior to 2018, the inflation adjustment results in PTCs generated in 2017 being worth 2.4 cents per kWh, rather than 1.5 cents per kWh.

Fortunately, the conference committee bill that reconciled differences between the House and Senate versions and was enacted into a law did not alter existing the inflation adjustment.

Base Erosion Anti-Avoidance Tax (BEAT): Hit By a Ricochet

The BEAT provisions target earning stripping deals between US corporations and related parties in foreign jurisdictions. This has relevance to the tax equity industry because some tax equity investors are banks or insurance companies with foreign parents or significant foreign operations.

The BEAT would be a tax (at a phased-in rate discussed below) on the excess of an applicable corporation's (i) taxable income determined after making certain BEAT required adjustments, over (ii) its 'adjusted' regular tax liability (ARTL), which is its regular tax liability reduced by all tax credits other than, through the end of 2025, certain favored tax credits. The favored credits are research and development tax credits; and up to a maximum of 80% of the sum of the low-income housing tax credits and the renewable energy tax credits (including the wind PTC).

However, the ability to exclude the renewable energy credits from the ARTL calculation ends beginning in 2026. As the PTC is a 10-year stream, BEAT could discourage investment in wind farms by tax equity investors subject to BEAT. As a result, such tax equity investors could favour investment in solar projects that qualify for the ITC that arises in the first year, rather than wind projects with their 10-year PTC stream.

Alternatively, tax equity investors could try to use their market strength to persuade sponsors of wind projects to elect the ITC. As discussed above, this would also mean that a lease structure could be used, which is a more efficient means to monetize 100% bonus depreciation. However, for land-based projects the ITC is often less valuable than the 10-year PTC, so such a decision would typically mean a loss of project value for the sponsor.

The act provides a phase-in of the BEAT rate. Under the phase-in, the BEAT would be 5% for tax years beginning in 2018, 10% for tax years beginning between 2019 and 2025, and 12.5% thereafter. In the case of banks and securities dealers, the general BEAT rate would be increased by one percentage point.

As tax equity transactions are modeled, diligenced and executed, the full ramifications of tax reform will become more apparent. The wind industry has proven itself resilient over several decades and that resilience will serve it well as it adapts to the changes in the market's landscape due to tax reform.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions