Tax Law Changes in the Inflation Reduction Act of 2022 (HR 5376) | Sheppard Mullin Richter & Hampton LLP
On August 7, 2022, the Senate passed the Reducing Inflation Act of 2022 (HR 5376) (the “Reconciliation Bill”) on a party-line vote with the deciding vote cast by the Deputy President. Senate passage of the Reconciliation Bill likely satisfies the requirements for a proposed tax law change, as set out in most tax equity funding documents. However, in general, these agreements require that only proposed adverse tax law changes be reflected in the base scenario model prior to a funding date. In general, changes that affect an investor’s tax capacity are outside the scope of a proposed tax law change, but, as discussed below, even if the alternative minimum tax on corporations was considered an adverse amendment, the AMT, as ultimately adopted, is not expected to have a material adverse impact on fiscal capacity.
The Reconciliation Bill (officially titled “An Act to Provide for Reconciliation under Title II of Resolution S. Con. 14”) provides significant incentives for the development of renewable energy facilities, many of which are driven by tax incentives. Through the combination of expanded tax credits and passage of Ron Wyden’s resource-independent “Clean Energy for America Act,” wind and solar energy tax credits (extended to stand-alone storage) are restored to pre-elimination rates at least for construction commencing until 2033 which, assuming a continuation of the four-year continuity safe harbor, extends the full credit period by 15 years. This long-term extension provides certainty for the development and financing of wind and solar (and storage) to a degree never before achieved by the industry. In addition, the Reconciliation Bill aims to reduce the bottleneck created by the limited capacity for tax fairness by allowing the portability of tax credits. While welcome, portability leaves the benefits of accelerated depreciation unused. The real impact of portability remains to be seen.
There is little bad news in the reconciliation bill. The Alternative Minimum Corporate Tax – which was enacted to fund the large investment in climate change – allows the use of tax credits to offset the tax payable on AMT. Similarly, last-minute changes to the Reconciliation Bill reduce financial statement revenue by accelerating the depreciation of tangible assets, allowing capital cost allowances on renewable facilities to offset the AMT tax liability.
The attached table summarizes the provisions of the reconciliation bill applicable to wind, solar and stand-alone storage and provides our initial observations as to their impact. We intend to complete the picture with a similar summary addressing carbon capture, biogas, clean hydrogen and other renewable resources addressed in the reconciliation bill. We also intend to maintain the summary as further guidance is released and enforcement provisions are adopted in the marketplace. Please continue to check this page for further updates.