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Solar: Now-Favorable Tax Treatment Would Take a Hit

After years of benefiting from various renewable energy programs implemented by the Obama administration, as well as on a state level, the U.S. solar industry is now confronting federal tax reform that could bring possible negative impacts to its development.

Among the provisions of the GOP Blueprint that are troublesome for the U.S. solar industry:

Lower Rates

Many solar developers have no or little income tax liability. But its equity partners do, and the Investment Tax Credit (ITC) available to solar projects can benefit those partners. In fact, the investors are often referred to as tax equity investors, because their investment is driven in part by seeking the tax benefits from the solar project. Under the ITC, they can offset their federal income taxes by 30% of the project investment. But a lower corporate tax rate reduces the value of the benefit of lowering the corporate tax base and thereby reduces the value of the tax equity investment. As such, it would be expected that tax equity investors will seek various concessions, requiring solar project developers to seek more debt or put up more equity themselves. That could be bad news for smaller solar projects whose developers don’t have that kind of financing power.

Full Deduction of Expenses

Solar projects already have deductibility benefits under current law. The recovery schedule for solar projects is five years; for conventional power plants, it’s 15-20 years. Under the GOP Blueprint, all expenses can be deducted in the first year. Solar’s advantage would disappear.

Border Adjustment

On average, a solar project in the U.S. has imported parts that make up between 60% and 70% of the total components. The border adjustment aspect of the Blueprint is a possible headwind, as it is not an industry with significant exports—so it can’t benefit from the lack of export inclusion in the revised tax plan—but would face the need to include all import costs into its tax base. For the solar industry then, it must deal with the same uncertainty that the retail industry faces: will the dollar adjust to compensate for the higher tax-driven import cost? If not, the low-margin solar hardware industry will need to try to pass higher costs on to consumers.