Overview
Key Takeaways | Trump’s Proposed Tax Cut Bill: Implications for the Energy Sector
During the webinar, Partners Philip Tingle and Heather Cooper discussed the Trump administration’s proposed multitrillion-dollar tax cut bill that’s currently in the US House of Representatives, focusing on its implications for energy tax credits, transferability, and foreign entity restrictions. They also covered the commercial and transactional impacts of the proposed changes, which would significantly alter the landscape for project finance and clean energy development.
Top takeaways included:
1. Early Repeal and Phase-Outs. Some tax credits are on the chopping block for full repeal while others would be phased out earlier than expected (i.e., 48E, 45Y, and 45X). The phase-out would be triggered by the placed-in-service date, not the begin-construction date (as had been expected based on past precedent). This may alter how developers think about their grandfathering strategy going forward, since many developers were optimistically planning around a phase-out tied to the begin-construction date.
2. Transferability Is Out. Tax credit transferability under Section 6418 would be repealed – but not for another two years. In some cases, the repeal would apply to any tax years starting after the two-year mark while for some credits the repeal would grandfather in projects beginning construction before the two-year cutoff. This is a planning opportunity for developers, since it would give them up to four more years for transfers beyond the two-year cutoff.
3. New Foreign Entity Rules. The tax credits would all be impacted by new, highly complicated rules on foreign entities of concern. These rules would both restrict tax credit users and disqualify projects and domestically manufactured products from generating tax credits where there are materials or payees from certain high-risk categories of foreign persons. The list includes Chinese companies and controlled subsidiaries, which will highly complicate procurement and other project structuring.
4. Begin-Construction Rules Return to Foreground. For developers, begin-construction strategies could help preserve eligibility for transferability under several credits, even if placed-in-service occurs later. This planning tool reemerges as a critical consideration. Developers will need to brush up on their begin-construction strategies going forward.
5. Section 48 vs. Section 48E: Strategic Differences Emerge. Traditional Section 45 and Section 48 credits are not subject to the new foreign entity rules, making them potentially more attractive for projects that qualify before 2025 begin-construction cutoffs. This could influence structuring decisions between the legacy and tech-neutral regimes.
6. Implications for Tax Credit Buyers. It remains unclear whether tax credit buyers (not just sellers) will be subject to the foreign entity restrictions, pending Internal Revenue Service guidance. This uncertainty raises risk allocation and diligence issues for credit purchasers.
7. Commercial Risk and Insurance Complexity. The 10-year recapture period for foreign-related violations will challenge conventional deal structures, particularly around representations, guarantees, and tax credit insurance. Pressure on indemnity caps and tail coverage provisions is expected.
8. Not the End But a Turning Point. While the tax cut bill imposes significant changes, it’s not a full repeal. There’s time to adjust and strategize, especially with final phase-outs not starting until 2029. There’s also political uncertainty ahead, which could shift the landscape again.
