The recent passage of H.R.1, the Tax Reform Bill (Bill), had several important provisions that will change the economics of corporate renewable energy projects. In this blog, we’ll focus on how the Bill will affect new, corporate-owned, solar PV installations. While there are a few provisions—such as BEAT, NOL, AMT, Interest Expense, and Partnerships—that will selectively affect some companies, our focus will be on those provisions that are likely to impact the broadest cross-section of companies currently considering installing and owning on-site solar PV. We’ll begin with a summary of the new corporate tax rate, renewable energy tax credits, and bonus depreciation, and end with a before/after comparison of the Bill on a corporate solar PV project.
- The headline change is the Federal Corporate Tax Rate, which was reduced by 40 percent, providing corporations the lowest rate seen in decades. The rate drops from 35 percent to 21 percent and, for companies who install solar projects, it will result in an increase in after-tax cash flow to the project.
- No changes were made regarding the investment tax credit (ITC) or the production tax credit (PTC) as previously amended by the Consolidated Appropriations Act, 2016 (Act), which extended and modified the ITC, PTC, and bonus depreciation for solar and wind energy property. The Act introduced a gradual step-down in the credit value for these technologies over a period of several years These provisions remain in effect, except for bonus depreciation (next point).
- The final provision in the Bill, Bonus Depreciation, will be important to most companies considering installing and owning renewable energy projects. While the Act extended the 50 percent bonus depreciation, the Bill will increase it to a 100 percent first-year deduction on the adjusted basis of qualified property placed in service after September 27, 2017 through December 31, 2022. Starting on January 1, 2023, the bonus will be phased-down in annual 20 percent increments until reduced to zero after 2026. An important point to note: the impact of the time-value-of-money benefit resulting from the 100 percent first-year depreciation deduction will be tempered somewhat by the reduction in the corporate tax rate from 35 percent to 21 percent.
To put this in perspective, we’ve run a hypothetical, corporate, rooftop solar PV system to compare the impact of reducing the federal corporate income tax rate to 21 percent and increasing the bonus depreciation to 100 percent. Only the federal tax rate and bonus depreciation have been modified in the financial model, with all other factors/assumptions being equal in the two scenarios.
|Scenario||Fed Rate||Depreciation||Payback Period*||25-yr After-Tax ROI||10-yr After-Tax IRR||25-yr IRR Change|
|Old Rules||35%||50% bonus + 5-yr MACRS||7.6 years||102.8%||3.72%||10.44%|
|New Rules||21%||100% bonus||8.1 years||121.8%||3.31%||10.78%|
*Note how the new rules extend the after-tax Payback Period relative to the old rules. This is due to the interplay between the different depreciation methods and corporate rates as pointed out previously. The benefit of the lower tax rate eventually begins to show as the spread between the IRRs turns positive.
The results of the Tax Reform Bill will vary by project based upon utility/supplier energy rate schedules, net energy metering structures, owner’s ability to efficiently utilize tax benefits, available state/local/utility incentives, geographical location and associated solar irradiance, and many other factors that ultimately affect the project’s cash flow and economic viability.
If you would like to learn more about how ENGIE Insight can assist you in assessing the economic viability of your renewable energy projects or in evaluating the performance of existing energy projects, please contact your ENGIE Insight energy professional to schedule a consultation with our Distributed Energy Resources department.
ENGIE Insight does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.