Experts see 'huge ripple effects' from GOP changes to US energy tax credits

Congressional Republicans' proposed changes to the Inflation Reduction Act's clean energy tax credit regime would likely reverberate throughout the US economy, a panel of experts in tax law said June 26.

"This isn't just about energy tax credits," Amish Shah, a tax partner at Holland & Knight, said during a webinar on the fate of the tax incentives. "It does have huge ripple effects through the economy, and I think that's important to keep in mind."

Shah noted that the IRA's credit transferability provisions, which allow the sale to third-party buyers, have produced a flourishing tax credit market in the nearly three years since IRA was enacted. Project sponsors were previously required to rely on more complicated tax partnerships to monetize existing credits that largely benefited wind and solar projects, he said.

From 2022 to 2024, the US tax equity market more than doubled from $18 billion to $40 billion, with transferable clean energy tax credits accounting for virtually all of the increase, according to data from Norton Rose Fulbright.

"Transferability has brought in companies from every industry — who are totally doing things unrelated to tax credits — to come in and buy tax credits," Shah said. "The number of transactions that we have right now that are allowing people to build projects in the US because of the ability to transfer credits is absolutely enormous."

The panel of tax experts flagged multiple provisions in Senate Republicans' forthcoming budget reconciliation bill as particularly consequential for the future of the IRA tax credit market.

Senate Majority Leader John Thune (R-SD) is looking to pass the party-line budget bill by July 4. Timing for final bill passage is still unclear, however, as Senate and House Republicans work to resolve key differences, including conflicting phaseout approaches for the IRA credits.

Foreign entity, safe-harboring provisions

Tax attorneys and project developers are paying particularly close attention to new foreign entity of concern (FEOC) provisions included in both the House and Senate versions of the legislation. The FEOC provisions specifically apply to the IRA's technology-neutral 45Y and 48E clean electricity production and investment tax credits, as well as the law's 45X credit for advanced energy manufacturing.

The House GOP bill, passed in May, would prohibit credit-eligible projects from receiving "material" assistance from entities owned by or subject to the jurisdiction of a covered nation, explained Steven Schmoll, a senior director with Alvarez & Marsal Tax. Those countries are North Korea, China, Russia and Iran.

The House bill does not include a de minimis exception, making the lower chamber's FEOC provisions largely "unworkable" in the eyes of industry professionals, Schmoll said.

The Senate Finance Committee, in contrast, has proposed a gradually increasing percentage-based cost threshold for determining FEOC applicability. The Senate bill language is not retroactive in nature, Schmoll noted, meaning projects that commenced construction in 2024 would be safe harbored under current law.

"If you were able to safe harbor those projects, you generally have until 2028 to get them in service," Schmoll said.

Under the Senate committee's proposal, the 45Y and 48E credits for wind and solar would phase down to 60% of their full value starting in 2026, then 20% in 2027, and be fully eliminated in 2028. All other carbon-free technology types, including energy storage, would be eligible for 100% of the credits through 2033.

"When you're thinking about pricing a [power purchase agreement] in the market — whether you're an investor, you're an offtaker, or you're a developer — there are some interesting economic questions as to where that kind of market price is going to settle out at," Schmoll said.

"You can end up with fact patterns where somebody who gets a full credit might be able to come in and price slightly below somebody who's not getting a credit, and it almost ends up being a double benefit for the person who's safe harbored."

Bill could suppress appetite for credits

At a broader level, proposed changes to how companies calculate bonus depreciation, deduct interest and expense research and development costs could result in lower overall corporate tax liability, said Patrick Browne, senior vice president at Marsh.

Under the GOP legislation, companies will be allowed to take higher interest deductions and fully expense R&D, he noted.

"Taxpayers who are buying these credits — are they going to have as much taxable income to offset if some of these other provisions come back in a more fulsome manner?" Browne said.

Shah suggested that the IRA credit market could remain robust over the next several years, even assuming earlier credit phaseouts and restrictions. "All of that kind of goes into a mixing bowl, and we'll have to see how that that plays out at the end of the day," he said.