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Forbes
17-06-2025
- Business
- Forbes
In The Zone: Changes To Opportunity Zones In The House Budget Bill
UNITED STATES - DECEMBER 15: HOUSE CHAMBER—The House floor from the Speaker's chair. (Photo by ... More Scott J. Ferrell/) In this episode of Tax Notes Talk, Jessica Millett of Hogan Lovells discusses the proposed changes to the Opportunity Zone program under the House version of the One Big Beautiful Bill Act and how the Senate might react. Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: open to new opportunities. We've been covering the House's One Big Beautiful Bill Act and its changes to tax administration. This week, we're continuing our deep dive and exploring how the reconciliation package would affect the Opportunity Zone program. Opportunity Zone legislation was originally enacted in the Tax Cuts and Jobs Act to provide incentives for investment in low-income areas. The new bill aims to improve the program, including making changes to reporting requirements and key definitions. Here to talk more about this is Tax Notes contributing editor Marie Sapirie. Marie, welcome back to the podcast. Marie Sapirie: Thanks. It's good to be here. David D. Stewart: Now, I understand you recently talked with someone about this. Who did you talk to? Marie Sapirie: I did. I spoke with Jessica Millett, a partner at Hogan Lovells. Jessica has extensive experience in real estate transaction tax issues generally, and in the Opportunity Zone program specifically. David D. Stewart: And what all did you talk about? Marie Sapirie: We discussed many of the details of the changes to the Opportunity Zone program in the House's version of the One Big Beautiful Bill Act. This is a highly timely conversation because we're expecting the Senate version to be released soon, so having all of the background on how the House approached the extension and revision of Opportunity Zones in mind will be helpful in understanding any changes the Senate might make. David D. Stewart: All right, let's go to that interview. Marie Sapirie: Thank you, Jessica, for joining us today to discuss the proposed changes to the Opportunity Zone program in the budget bill that Congress is currently working on. Jessica Millett: Thank you, Marie. I'm really happy to be here with you all. Marie Sapirie: The budget bill has passed the House with a renewal and extension of the Opportunity Zone program, and it is currently in the Senate, where further changes to the bill are anticipated. Since our focus today are the changes to the Opportunity Zone program, it might be helpful to review the Opportunity Zone program to this point. So would you tell us a bit about the history of Opportunity Zones up to the recent proposal? Jessica Millett: We'll call it OZ 1.0, the initial version of the Opportunity Zones program that came to life with the Tax Cuts and Jobs Act. The first part of that program was the designation of the zones themselves. And obviously that's important because it's important to know where those zones are; that governs the whole rest of how the tax incentive works. But it was a relatively short-lived piece of the OZ program. USA Politics News Badges: Pile of Tax Cuts And Jobs Act Buttons With US Flag, 3d illustration The designation process all took place in the first half of 2018, and the way that it worked is the governors of each state were able to designate a certain percentage of their low-income census tracts as Opportunity Zones. They were able to designate 25 percent of those low-income census tracts. And for this purpose, the definition of low income piggybacked off of the definition of low income for purposes of the new markets tax credit, and they looked there to factors such as poverty rates and median family income in the relevant census tracts. The other wrinkle, I would say, in terms of the designation process the first time around is that certain contiguous census tracts could be nominated as Opportunity Zones. And what that means is that if a particular census tract itself did not meet the definition of low income but was contiguous to a census tract that did meet the definition of low income, then that contiguous tract could be nominated as long as it didn't have median family income over a certain hurdle amount. So we'll talk about that in a minute, when we get to the new program. Those are the zones; they were designated in 2018. They have remained the zones throughout the entire program, even though we've had a new census since then. And so they are in effect now until, asterisks — they were supposed to be in effect until 2028. But again, we'll talk about that. Marie Sapirie: So the rules for deferring capital gains through investments in qualified opportunity funds are prescribed in section 1400Z-2. Since you've talked about the designation part, could you talk about how the statute generally works in its current form? Jessica Millett: For sure. So, 1400Z-2 and the supporting regulations, which came out over the course of several years after 2017, they are really the bulk of the OZ qualification and compliance that everybody has been dealing with since then. So I'll break it down into a couple different buckets. So first, from the perspective of the investors, there are certain — obviously, people do this for the tax incentives, and so 1400Z-2 runs through the various tax incentives that an investor can achieve by investing in the OZ program. They include deferral of paying tax on certain eligible capital gains. For a while there was a basis step-up, which was essentially complete elimination of some of those initially invested gains if you invested early enough. And then there was a complete elimination of gains on the new project, new development in the Opportunity Zone as long as an investor had stayed in for at least 10 years. So there were lots of rules and qualifications around all that. You jump down a level to the qualified opportunity fund rules, and the QOF is a required piece of an OZ structure. An investor has to invest their eligible gain directly into the QOF to get the tax benefits, and QOFs have an asset test they need to meet. They can only be certain types of entities — corporations or partnerships for tax purposes. And the rules also cover the penalty if a qualified opportunity fund fails to meet its asset test. So if you go down one more level, you get to the actual qualified Opportunity Zone business [QOZB] level, and most OZ structures are set up with a QOF investing in a QOZB. And the QOZB is really where the heart of the OZ development happens. So if it's a real estate project, the QOZB is the entity that has to acquire the property, improve the property, develop the property, if you happen to be doing an operating business and the business itself is within the QOZB. So there's a lot of rules there, including a tangible property test, which is very relevant, of course, for real estate projects. There are rules relating to the working capital safe harbor, which is a very important compliance piece. There's rules — there's an antiabuse rule also baked into 1400Z-2, so there's a lot to parse through. It can be a tricky structure sometimes. Marie Sapirie: So let's turn to the proposed changes in the House bill. First, the bill provides for a new round of designations and revises the process. Would you tell us how the new round would work? Jessica Millett: Sure. So the process itself appears to be largely the same as the first time around, meaning that the governor of each state would be able to designate, again, 25 percent of the low-income census tracks in his or her state to be Opportunity Zones. However, importantly, instead of by merely piggybacking off of the definition in the new markets tax credit rules, the bill introduces some changes to the criteria to be a low-income zone. So the first time around, for example, a census tract qualified as a low-income zone if the median family income was no greater than 80 percent of the median family income in the relevant state or metropolitan area. They've now, in the House version of the bill, dropped that to 70 percent. So you're in a situation where your pool of eligible zones is smaller. There were some other nuances, too, including the fact that this time around they've eliminated the ability to nominate those contiguous tracks that we spoke about a moment ago. So I've seen some estimates floating around — I haven't crunched all the numbers myself — that the pool of eligible zones is potentially decreased by something like 20 to 30 percent, but you can still only nominate 25 percent of them. So that's something that a lot of people are disappointed in because you're reducing the number of overall Opportunity Zones in OZ 2.0. Marie Sapirie: There are also proposed changes to focus more tightly on rural areas. Would you explain how those rules would work? Jessica Millett: Yeah, for sure. There was some proposed legislation that was introduced a couple of years ago to create a mirror rural Opportunity Zone program. And so a lot of the provisions in the House bill related to rural zones pull from that proposed legislation. But essentially, the requirement is that at least 33 percent of the designations in any one particular state have to be rural census tracks, and the definition of rural for this purpose is determined on the basis of the Consolidated Farm and Rural Development Act. And so they really want to make sure that there's a focus on having these OZ investments be a little bit more geographically diverse than they've been in the first round. One of the big criticisms that has been hurled at the Opportunity Zone program is that a lot of the developments and projects that have been done have been projects that would've been done otherwise, and they're projects in gentrifying areas, metropolitan areas, etc. So this time around, they really wanted to make sure that more rural areas received the benefit of Opportunity Zone investment, as well. Marie Sapirie: Also under the existing programs, only capital gains can be invested, but the House bill expands that. What are the parameters of that change? Jessica Millett: Yeah, this is a change that a lot of people had been asking for, as well, in a way to democratize the program a bit. One of the other criticisms is that, well, if you need capital gain to invest, your pool of investors is fairly limited. And wouldn't it be nice if you could give everybody the ability to invest in the OZ program? However, the way that the House addressed this has been really panned almost universally from everybody that I've spoken with, because they give individuals a one-time $10,000 lifetime amount that you can invest into a qualified opportunity fund. But from a fund perspective, if you are really wanting to invest in a fund, $10,000 is far below the minimum required investment that I've seen in any fund, whether qualified opportunity fund or otherwise. And again, it's not like it's an annual investment amount; it's a lifetime investment amount. So people seem pretty disappointed that this really isn't going to move the needle. stack of silver coins with trading chart in financial concepts and financial investment business ... More stock growth Marie Sapirie: The proposed second round would result in new zones in 2027, but the current program sunsets at the end of 2026. Could you talk about the effect of that timing? Jessica Millett: Yes. So as you mentioned, the new round runs from January 1, 2027, until December 31, 2033. So there's no overlap of the two programs. I've got some thoughts on why that's not the best idea. But in terms of the mechanics of the program, first and foremost, the zone designation process happens in the first part of 2027, and the inclusion date for any investments made in this new round is December 31, 2033. One of the incentives that the OZ 1.0 offered, as I mentioned a few minutes ago, was this basis step-up concept. And so in the first round there was a 10 percent basis step-up for investments that were made by the end of 2021, and there was a 15 percent basis step-up if you invested by the end of 2019. So again, it really incentivized people to invest early in the program. Here, there's no 15 percent basis step-up, but there is a 10 percent basis step-up. So in order to be eligible there, you would need to invest by the end of 2028 to get that 10 percent basis step-up. And notably, in relation to the rural qualified opportunity program that they are introducing, that basis step-up would be 30 percent if you had invested in a rural qualified opportunity fund. The other element of the program in terms of mechanics, focusing on the rural zones for just a second, is that in OZ 1.0 one of the ways that you could have qualifying property was by meeting the substantial improvement test. And so the scenario there is, if you buy an existing building that is in an Opportunity Zone, if you make significant capital improvements such that you double your initial cost basis of the building, you've substantially improved the building and its qualifying property. That's still the test in the second round, except if you're in a rural zone, then the substantial improvement threshold drops to 50 percent. So they're making it a little bit easier to qualify for the substantial improvement tests in rural zones. Marie Sapirie: And are there any other timing concerns with the new program? Jessica Millett: Yeah, there's a couple of things in particular that people are worried about. So first of all, as you mentioned, OZ 1.0 ends at the end of 2026, and this new program doesn't start until 2027. And the zones themselves, that zone designation process, doesn't even kick off until January 2027. So you're not going to know the new zones until mid-2027 at the earliest. That creates a little bit of a disincentive in terms of capital raising and investment in the Opportunity Zone program. You end up with this weird dead zone. So if you have gain — or I should say, if you are flexible in terms of when you can trigger your gain or when you want to invest it, etc., etc. — then there's an incentive to wait and invest in 2027, because then you get the deferral until the end of 2033, as opposed to trying to invest now. The corollary concern adjacent to that is, what happens with the first-round zones? In the legislation from the Tax Cuts and Jobs Act, the zones did not expire until the end of 2028. There's always been some questions around, well, what happens after 2028? But at the very least, if you are a qualified opportunity fund and you are looking at acquiring a site to do a development in one of the OZ 1.0 qualified Opportunity Zones, at least you know that you have a few years until the end of 2028. Even if you don't raise capital until 2026, you have some time to make a qualifying investment in property that's in a qualified Opportunity Zone. But in the House version of the bill, they accelerated the expiration date for the first-round zones until the end of 2026. And that's given people a real heartache because now you've introduced even more uncertainty. And so, again, if you have a capital gain that you realize on December 31, 2026, then technically you have until mid-2027 to even go and invest that into a qualified opportunity fund. But if the zones are all expired at that point, there's some real uncertainty in terms of whether you'll even be able to make a qualifying investment if all the first-round zones have expired. So people are really hoping that the Senate will iron out some of those transition rules to make it clear that the first program does still have a few years to run, and it doesn't really make sense to cut it off earlier than needed, artificially. Marie Sapirie: One of the pieces of the original program that was removed from the original bill because of the Byrd rules for the budget process was the information reporting requirements, and this bill attempts to put them back in. Would you tell us about those rules? Jessica Millett: Yeah, so there are different reporting requirements and different anticipated reports in a couple of different places. So first of all, at the QOF level, each QOF would have to file an annual return, including basic information and what's your tax classification, etc., and then getting more granular in terms of what's the value of your total assets, what's the value of your qualified Opportunity Zone property that you hold? And then with respect to each QOZB that QOF is invested in, you then have to include — again, according to the proposed legislation — information about the underlying QOZB, the different industry in which the QOZB has its trade or business, the relevant zone where the property is located, the amount of investments. Also, they're asking for relevant employment information, in terms of the average number of employees of the QOZB or other indicators of employment impact. So they're asking for a good amount of information from the QOFs. For the QOZBs, interestingly, they didn't get into too much detail in the proposed legislation. They punted it to regulations. But I suspect that the information that the QOZBs would have to provide is going to be similar to the information that the QOF needs to provide with respect to those QOZBs. So I think we have a good sense about what to expect there. There are some penalties for failing to comply with the reporting requirements. And then I think the most important one is that the legislation would require Treasury to issue a public report starting in year 6, and then year 11. And in both of those years — years 6 and 11 — after the legislation has passed, Treasury would have to include a five-year comparison showing different factors with respect to each of the zones. They would have to show the unemployment rate, the number of workers in each particular zone, the poverty rate, median family income, other demographic information. PHILADELPHIA - FEBRUARY 11: Blank Social Security checks are run through a printer at the U.S. ... More Treasury printing facility February 11, 2005 in Philadelphia, Pennsylvania. As U.S. President George W. Bush travels the country to stump for his plan to change the Social Security system, opposition continues from some members of Congress and senior citizen groups concerned that the proposal would erode guarantees to the federal retirement program. (Photo by William) And I think that's what a lot of people have been asking for. How do we know if this program is working? And without that data, it's easy for people to attack the program, and it's hard for defenders of the program to defend the program. So that would be great if we had it. Marie Sapirie: What other items were investors and opportunity funds and businesses looking for that weren't included in the House proposal? Jessica Millett: So a lot of people had been asking for permanence in the OZ program, or if not permanence, at least some sort of — maybe like a rolling deferral period. Because, again, the way that the OZ programs — OZ 1.0, and now proposed OZ 2.0 — are set up, you have a hard cliff date at the end, and so that's your inclusion date no matter what. And it means that the value of the tax incentive decreases the closer you get to that date because you no longer get the deferral benefits. So a lot of people have been hoping that there would be a rolling deferral mechanism. A lot of the OZ investments have been made in real estate. I have seen some operating business QOZBs, but the rules really don't always work so well. One of the big reasons why the rules don't work so well is the 10-year hold. So if you go and you start this brand-new great company in an incubator, if somebody comes and offers to buy your company because they think it's great and has a lot of potential, are you really going to say, "Oh, come back in eight-and-a-half years?" So a lot of people have been hoping for a situation like that that they would allow an interim gain reinvestment type concept, so that you could roll over your proceeds into a new business. We didn't get that. The fund of funds proposal has been out there for a while, and that would allow QOFs to consolidate for purposes of investing. There'd also been a request for allowing investments in CFDIs [community development financial institutions] to help dovetail with the new markets program, as well as perhaps some more leniency when it comes to affordable workforce housing, given that much of the country is in a housing crisis at the moment. So those are all a bunch of the things that I know had been asked for. Again, we'll see if the Senate picks up any of this, but I think at this point, having seen OZ 2.0, a lot of people are really focused in particular on transition rules and just making sure that OZ 1.0 and OZ 2.0 really dovetail with each other and OZ 2.0 doesn't cause an immediate freeze in terms of current fundraising or current Opportunity Zone development. Marie Sapirie: There is still a lot of work to be done before this bill gets over the finish line. Would you tell us what the next steps are and what we should be looking for in the Senate in particular? Jessica Millett: Yep. So the Senate is going to have their crack at this bill. Among the OZ community, there's a fair amount of optimism that some of these issues will get worked out. The first time around with the Tax Cuts and Jobs Act, there was no Opportunity Zone language at all in the House version of the bill; it was only introduced once the Senate got ahold of it. And Sen. Tim Scott, this has been his baby for quite a while. I know that there's been a lot of lobbying and congressional letter-writing trying to make sure that some of these key priorities are raised by the Senate. The one thing that I think everybody is also anticipating or keeping their eye on is whether the reporting requirements are going to get stripped out again. They don't strictly have a budget impact, which is why they had to come out the first time. So we're eagerly hoping that some of them make it through this time. Marie Sapirie: Well, thank you so much for joining us on the podcast today. Jessica Millett: Happy to be here.
Forbes
27-05-2025
- Business
- Forbes
The House Budget Bill's Clean Energy Tax Credit Changes
Environmentally friendly installation of photovoltaic power plant and wind turbine farm situated by ... More panels farm built on a waste dump and wind turbine farm. Renewable energy source. In this episode of Tax Notes Talk, Jenny Speck with Vinson & Elkins discusses the clean energy tax credits in the House's One Big Beautiful Bill Act, including last-minute changes to the House Rules Committee's version. David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: canceling the renewables? Early on May 22, the House passed the One Big Beautiful Bill Act, its version of the budget reconciliation bill. Included in the bill are planned phaseouts and repeals of many of the clean energy credits from the Inflation Reduction Act. As the bill heads to the Senate for review, we're taking a closer look at the House's clean energy rollbacks and how those changes could affect the industry. And keep an eye on your feed for next week's episode where we'll cover the bill in full with our Capitol Hill reporters. For now, here to talk more about the changes to clean energy credits is Tax Notes contributing editor, Marie Sapirie. Marie, welcome back to the podcast. Marie Sapirie: Thanks for having me. David D. Stewart: Now, I understand you recently talked to somebody about this. Could you tell us who you talked to? Marie Sapirie: Sure. I spoke with Jenny Speck, who is a partner at Vinson & Elkins in Houston. Jenny has extensive experience with energy tax credits and has worked on a wide range of projects, including wind, solar, combined heat and power, biogas, carbon capture, hydrogen, and clean fuel credits. David D. Stewart: And what did you talk about? Marie Sapirie: We discussed the clean energy changes in the budget bill currently called the One Big Beautiful Bill Act. The proposal makes significant changes to the IRA's clean energy tax credit regime, which Jenny explains in detail in our conversation. As a note for our listeners, most of this podcast was recorded on May 21 and largely reflects the current text of the budget bill. But there is a short update from May 22 at the end that reflects several significant revisions made just before the House passed the bill early in the morning of May 22. We've left in the discussion from May 21 about the phasedown of the technology-neutral investment tax credit and production tax credit that was included in the initial proposal from the Ways and Means Committee because the changes to those credits will likely be the subject of intense negotiations as the bill proceeds to the Senate. So we might see them again. David D. Stewart: All right, let's go to that interview. Marie Sapirie: Thank you, Jenny, for joining me today to discuss the energy tax aspects of the budget bill that is currently working its way through Congress. Jenny Speck: Thanks for having me, Marie. I'm very excited to be here with you guys. Marie Sapirie: The proposed budget bill was widely expected to include some changes to the energy tax credits that were introduced or expanded in the Inflation Reduction Act of 2022. Would you give us an overview of the IRA's tax credit changes to provide some context for the proposed changes? Jenny Speck: I'd be happy to. So the Inflation Reduction Act was passed on August 16, 2022, and it greatly enhanced many existing tax credits and added new ones that largely were very welcomed by the various industries. I'd say this was the first time that we'd seen tax credits — specifically investment tax credits, production tax credits — that exceeded the traditional baseline percentage of traditionally 30 percent, for example, in terms of investment tax credits and the amount of credits available overall. Because it introduced a lot of new concepts that we had not had before in terms of requiring prevailing wage and apprenticeship requirements, domestic content bonuses, energy community bonuses, low-income community bonuses, it greatly broadened the way that you can monetize tax credits as well in terms of introducing a direct-pay election and transferability as well as where you can sell tax credits. So overall the Inflation Reduction Act was a huge boom for the clean energy, clean fuel industries. Other types of incentives that were added would include clean hydrogen production, advanced manufacturing production credits. There was a new clean fuel production credit as well that was intended to replace the existing blenders and alternative fuel credits. Largely, I would say these credits are looking at — nearly unanimously across the board — some changes under the One Big Beautiful Bill, and we can get into that next. Marie Sapirie: Right. So in the proposal, some of the credits that were either expanded or introduced in the IRA and one of the major features, the transferability, are slated for repeal, and there are modifications to many other of the credits. One of the significant modifications is the expansion of the foreign entity of concern rules, which are now the new prohibited foreign entity rules. What are those rules and how does the proposed bill change them? Jenny Speck: That's a great question. So taking a step back, the foreign entity of concern, it's not a new concept. It technically is incorporated in various DOE loans, grant programs. It was actually in a couple of other tax credits, the section 30D, the CHIPS bill, the manufacturing investment credit. It's not a new concept, but they certainly enhanced it and expanded it beyond what it traditionally was used for in terms of basically disincentivizing foreign entities of concern to be invested in certain taxpayers here in the U.S. or doing certain investments here. And so the concern we have here is, not only does it translate with prohibited owners, but it goes significantly beyond in terms of you can't even receive material assistance from one of these entities. And that's pretty challenging — at this early of a stage in analyzing the One Big Beautiful Bill — it's pretty challenging to start strategizing for how does our supply chain react to getting ahead of these potential changes that will be implemented soon. So maybe we just talk about it in context with one of the credits because this actually was threaded through nearly all of the tax credits. But I would say there's three that I say rise to a higher level of having foreign entity of concern stringent rules put on them as compared to others. And those would be the clean electricity production credit, the clean electricity investment credit, and the advanced manufacturing production credit. Those three have the material assistance limitations as compared to all of the other tax credits that would have this new foreign entity of concern ownership. The specified foreign entities, foreign- influenced entities — prohibiting those certain taxpayers from effectively benefiting from these tax credits. So those three, largely what we're looking at is a couple of things. Like I said, it's ownership-related. We're looking at any foreign entities of concern, so think certain terrorist organizations, things of that nature, but also goes beyond looking at these foreign entities that are influencing the taxpayer that's eligible for the credit. It's looking at whether or not there's payments made and whether those payments are in relationship to maybe royalties, dividends, other types of compensation that generally could be paid in terms of whether it be ownership or maybe related to certain IP, things of that nature. So it really is pretty broad in terms of who can participate now in an ownership perspective, but also I'd say the material assistance issue is really what I think a lot of us tax practitioners are analyzing thoroughly and trying to kind of strategize and prepare ourselves for how that might infiltrate and impact different industries that don't have the supply chain domestically to support pulling back from procuring components from other countries that might currently be excluded or considered as a foreign entity of concern. Marie Sapirie: And what might be the potential impact of those changes and especially the material assistance? Jenny Speck: The material assistance, I think the issue is, you have to look at — it's any component, subcomponent, applicable critical mineral. It really is pretty granular on how they are analyzing what is material assistance. It even gets into the design of the property, whether it's based on any copyright or patents held by a prohibited foreign entity know-how trade secret. There's some exceptions or exclusions to that rule in terms of whether or not the component was not uniquely designed or not exclusively or predominantly produced by the prohibited foreign entity that would exempt taxpayers from being subjected to this material assistance prohibition. But again, these are new rules and concepts that we've not seen before because they are broader and more inclusive of trying to make sure any ties to these foreign entities of concerns are blocked from benefiting from any tax credits. So the impact on the industry, it's hard to measure what the impact is, but I would say right now there's definitely a lot of concern of where do we source these components since we're not quite clear how these exceptions would apply to the general rule. So it's a lot of just strategizing because even two years out — we have taxpayers who plan further than that, right? So they're trying to adjust and think through what do they have that's more than two years out that they need to adjust and potentially source from other countries, or if there's a supply chain here in the United States that's developing, maybe we can help accelerate that as well. Marie Sapirie: The bill also proposes to end the ability for clean energy project developers to transfer their credits to other taxpayers, which as you mentioned, is a way for developers to monetize their credits and finance their projects. To put this proposal in context, would you tell us about how transferability has developed since it was introduced in 2022? Jenny Speck: Transferability has been amazing to watch progress and evolve since it was first enacted and allowed under the Inflation Reduction Act. So I think to understand how it's evolved, maybe we take a step back to understand: What were our options before transferability? Closeup of the documents of the Inflation Reduction Act of 2022. The Unites States Senate passed the ... More Inflation Reduction Act, the climate, tax and healthcare legislation, on Sunday, August 7, 2022. And prior to transferability, generally these tax credits, they're known as general business tax credits. They can be used to reduce your regular tax liability. And if the taxpayer who generated the tax credit does not have a tax appetite, then their options were either to carry it back one year or carry it forward 20 years. And imagine the time value of money, if you're carrying credits that are worth multimillions of dollars on a carryforward schedule, it doesn't really add a lot of value today. The Inflation Reduction Act modified those carryback and carryforward rules to three years back and 22 years forward. But again, time value of money, a lot of developers, they need the money now to continue to operate the project and begin their next project in the pipeline. And so traditionally we had what we call tax equity investors coming into these different developers through a partnership in exchange for cash. Largely, you're looking at participating in these projects and a large benefit of that is finding someone who has the appetite to benefit from the different tax credits and deductions available as the project is operational for a certain period of time. These investors — I mean, this market has been developing and growing and it was really stable before the Inflation Reduction Act. And I would say it's continued to grow. I don't want people to think that the tax equity market took a dip even though transferability became available. We actually saw it continue to grow and these two options work in tandem frequently, where we saw tax equity investors who are also interested in partially selling all or a portion of their available credits that were coming out of the projects as well. So transferability, when it came into play under the Inflation Reduction Act, it allowed the developers or the taxpayers who generated the tax credit in certain circumstances to sell those tax credits to an unrelated third party. The market, I believe they were estimating last year was at $40 billion, to give an example of how many tax credits are being exchanged right now or sold. Probably a better way to look at that. And this year, I know it's only May. I mean it's hard to even count on two hands and two feet the amount of deals that I've personally done and that doesn't even include the rest of the renewables group at Vinson & Elkins. We have had so many ongoing tax credit transfer transactions and it really is opening up options, especially if the developers, maybe they're not looking for an outside participant in their project. Maybe they're solely wanting to just sell their tax credits and continue developing additional projects versus having a partner. So it gives flexibility to developers, it gives flexibility in general. And honestly, we're seeing a lot of new, I think, stakeholders that otherwise were not familiar with the clean energy industry entering into this industry because it's appealing to buy tax credits at a slight discount that you can again use for a dollar-for-dollar reduction on your tax liability. And I've seen new stakeholders who are interested in potentially becoming tax equity investors now, or maybe doing their own clean energy projects because they're learning more about this industry and seeing the benefits of these activities to increase the electricity available through solar and all the different technologies that we have available. And really honestly, the transferability market, I can't say it's taking a huge hit with the One Big Bill moving forward, but it's certainly causing people to pause and say, "They're looking at changing transferability. What does that mean for our projects that are under development that we're seeing taxpayers start negotiating 2026 and even trying to think of [20]27 projects?" And you're seeing those taxpayers pause and say, "How will this impact our deal?" And that's one thing that I want to point out is currently yes, it would repeal transferability, but there is largely beginning-of-construction timelines here. So let's talk about the beginning of construction from a transferability repeal standpoint. So largely a lot of these tax credits, like the existing 45Q, carbon capture credit, 45U, 45X, I mean you name it. It's the alphabet soup. All of these generally are available for transferability, all of them except the zero emission nuclear power production credit, clean fuel production credit; those currently have a hard stop for transferability for fuel or electricity produced after 12/31/2027. So fuels produced and sold after that period. Same with transferability on the 45U nuclear power production credit. That would be a hard stop regardless when you begin construction. But a few of the others, like the carbon capture credit, the tech neutral production tax credits, and investment tax credits, those all have beginning-of-construction phaseouts. So as long as facilities begin construction before the date that is two years following the date of enactment, then you could grandfather yourself in to still be able to transfer the tax credits from that project, which is really nice because beginning-of-construction rules have been around for decades. We have a lot of guidance on what that means. It's a tax technical term. And we've helped clients strategize on how to basically begin construction for many decades now in terms of thinking how this term has been used and intertwined in various tax bills before. And so it's not a concept that is going to be new to developers, but I think it definitely, when taking into consideration the foreign entity of concern restrictions, it's going to help push certain taxpayers into rethinking their strategy. Perhaps before, they might've considered, I'll do offsite physical work of a significant nature or maybe the 5 percent safe harbor. And these are all, again, ways to start construction by entering into a long lead item, procuring a manufactured component, but they're going to have to really consider where is that manufactured component being manufactured, where is it being sourced from? And so I do think it's going to cause developers to reconsider their strategy and make sure that their beginning construction would align with these foreign entity rules as well. Marie Sapirie: And you mentioned this a bit before, but could you expand on what might be the effects of the elimination of the transferability? Jenny Speck: The effect is, I think we'll have to see a market go back to solely using tax equity investors or some other combination thereof because there's still a few, and maybe that's worth saying right now: There's still a few tax credits for tax-paying entities that can claim direct pay for a period of time. Direct pay was not touched. Tax-exempt entities can still do direct pay on these credits, but if you remember, those credits are the 45Q carbon capture credit. There's a five-year period you can claim direct pay. It's also for the 45X and the 45V credits, that clean hydrogen production credit. So direct pay is still an option. Tax equity investors are obviously, it's still always going to be an option as well with and without transferability, but I think it's going to really push the bottom economics down for these projects who aren't going to be able to monetize their tax credits unless they come up with a new creative way of entering into, like I said, a tax equity investment structure or, if they're not one of the lucky, direct-pay-eligible credits. Marie Sapirie: Could you talk about some of the other changes in the bill? There is a change to the treatment of geothermal heat pumps, for example. 24 March 2022, Baden-Wuerttemberg, Rottweil: The ventilation system of a heat pump is located in ... More front of a residential building. Photo: Silas Stein/dpa (Photo by Silas Stein/picture alliance via Getty Images) Jenny Speck: That's a good question. So I think everyone largely noticed that there was only one technology under the section 48 tax credit that was called out to basically accelerate that beginning-of-construction deadline, and that was geothermal heating. Basically, they're accelerating the deadline by three years to 2032 and they're phasing it down, so it phased down technically. If your construction began before January 1, 2030, and it was placed in service after December 31, 2021, which — that goes back to the original Inflation Reduction Act of how these properties need to be placed in service after a certain date, don't think that that was a typo in the bill — that would be eligible for the full 30 percent and all the other adders if you qualified for the domestic bonus or the energy community and so forth. But after construction begins, calendar year 2030 is when you start seeing it phase down. So if you satisfy the prevailing wage and apprenticeship rules, it would phase down to 26 percent and thereafter the following year it'd phase down to a 22 percent investment tax credit percentage. And if you began construction after December 31, 2031, then it phases completely down to 0 percent. I want to point out that is the only technology under section 48, because if you recall the others, largely, you'd begin construction before December 31, 2024. So these credits aren't even in effect technically, in terms of being eligible to start construction today and qualify for section 48. You'd be pushed into that tech- neutral ITC under section 48E instead. And so I think geothermal heat pump technology developers need to be cognizant of these new begun construction dates and the phasedown percentages specifically. But I want to make sure it's emphasized that if you had started construction by the end of last year on solar, wind, any of those other technologies under section 48 and section 45, then those projects remain grandfathered under those tax credits. They're safe from a transferability perspective as the bill's currently drafted today. And so those developers, I think, are in a really good spot. It's the unknown of what amendments we're going to see coming out on the One Big Beautiful Bill that impact any other existing credits in effect today. Marie Sapirie: There are phasedowns of the technology-neutral credits in sections 48E and 45Y proposed. Could you explain how those work and how they would impact the credits? Jenny Speck: So under the new tech-neutral tax credits, you're right. These are phased out beginning for projects that are placed in service after December 31, 2028, and it's terminated completely for projects placed in service after December 31, 2031. And so I think along the same lines with thinking about the transferability repeal and how you have the beginning of construction; remember, this is placed in service and not beginning of construction, which was what technically was in the prior Inflation Reduction Act, is the phaseouts were correlated with beginning-of-construction dates. So that means developers are going to have to think about, "Well, what am I placing in service now?" Right? And so it's really going to, I think, accelerate the timeline of many developers trying to push their projects quickly so that they're placed in service before December 31, 2028, because once it starts exceeding beyond 2028, that's when the phasedown begins. So if it's placed in service in 2029, for example, it's 80 percent of the value. If it's placed in service in 2030, it phases down to 60 [percent], in 2031, 40 [percent], and then thereafter it's 0 [percent]. And so I think there's going to be a lot of developers thinking about this accelerated timeline and how to meet it in light of, again, all these other new parameters that we've not thought of before in terms of where you're sourcing your components or an entity of concern, the material assistance. So it's all going to interplay and I think cause a little bit of pressure in terms of accelerating these projects forward. Marie Sapirie: And will the placed-in-service standard in particular cause any additional pressure? Jenny Speck: I do. I think the placed-in-service standard is going to cause additional pressure, and we've seen it before in terms of placed-in-service dates under the section 45 production tax credit, and the section 48 investment tax credit. So we've seen taxpayers have to essentially accelerate, hurry up, place their projects into service by a certain timeline in order to qualify. And so now, instead of having the more flexibility of saying, "I only have to start construction and then I can continue on as planned," now it's a, "Hurry up and let's push forward to get placed in service so that we're not receiving a haircut on our tax credit." Marie Sapirie: Are there any other credits that have been affected that are not in the wind or solar or one of the technology-neutral credits? Jenny Speck: That's a good question. I would say one positive was the clean fuel production tax credit. It, under the Inflation Reduction Act, was only allowed for fuels produced and sold between calendar years [20]25 through the end of 2027. And that actually was extended out through December 31, 2031. Now, there's still the transferability restrictions that I mentioned earlier in the podcast, of when you can sell those tax credits, but I do think it's a win that we're seeing this tax credit extended. They did incorporate some certain feedstock restrictions, which again, kind of aligns with that same foreign entity of concern thought process that we're seeing in the other tax credits. Another one that I want to point out that, on the opposite end of the spectrum of the clean fuel production credit, is the clean hydrogen production credit. They accelerated that beginning-of-construction deadline all the way to the end of this calendar year. So any of the hydrogen developers who are considering their projects and where they're at currently in their development process should consider their beginning-of-construction strategy. I'll add they did not touch the transferability or direct pay for section 45V, the clean hydrogen production credit. They only accelerated that beginning-of-construction deadline. But that does put an immense amount of pressure on hydrogen developers right now. And then last but not least, I do want to mention that the carbon capture credit, they did not touch the beginning-of-construction deadline for that tax credit. Again, they changed the transferability rules so that you have to begin construction before that two-year timeline period. But you're not precluded from selling your tax credits as long as you start construction before that date. You can sell your tax credits for your 12-year credit period. So I do think that is a win for the carbon capture industry. Marie Sapirie: Jenny, thank you for coming back to the podcast on short notice. It's May 22, and we have some important updates to the House's revisions of the One Big Beautiful Bill Act that affect the clean energy credits. WASHINGTON - JUNE 5: The U.S. Capitol is shown June 5, 2003 in Washington, DC. Both houses of the ... More U.S. Congress, the U.S. Senate and the U.S. House of Representatives meet in the Capitol. (Photo by) First, the House bill changed the technology-neutral ITC and PTC. Would you describe those changes and tell us about what impact they may have? Jenny Speck: So previously we saw a phaseout period that we discussed, and now they have removed that phaseout period for the section 45Y and section 48 and instead replaced a termination deadline for projects that do not commence construction before 60 days after the bill is enacted or for projects that are not placed in service after December 31, 2028. There is an exception for certain nuclear technologies, which are allowed credit so long as they begin construction by December 31, 2028. But for all other technologies listed in section 45Y and 48E, it has greatly accelerated when those credits will potentially no longer be allowed. Marie Sapirie: Second, there is a change to the nuclear credits. Would you tell us about that change? Jenny Speck: Previously they had phased down the nuclear credits similar to the approach they had taken with the clean electricity production credit, clean electricity investment credit. But instead, they softened that and removed all phasedown and said the credit is allowed at full value through December 31, 2031, which, just for those of you listening, under the Inflation Reduction Act, it was through 2032. So it really just pulled it in one year and I think is a win for the nuclear industry. Marie Sapirie: And finally, would you explain what the rest of this process looks like for the clean energy credits? Jenny Speck: One other thing I wanted to add real quick though, on 45Y and 48E for those taxpayers who are trying to qualify, is the material assistance from prohibited foreign entities. The effective date basically applies to projects that begin after December 31, 2025. Under the earlier version that we talked about yesterday, there was a longer transition period, and so they should start being mindful of those new rules because they'll be affected pretty soon. But what's next to come? The bill's headed to the Senate, there has been a lot of public discussions on what certain senators think of the bill as it's evolved in the House. So we expect there to be a heavy debate and mark in the Senate, and then those changes will have to go back to the House to be considered. And once both the House and Senate have passed the bill, it'll go to the president's desk for signature. Marie Sapirie: Thank you so much for joining the podcast. Jenny Speck: Happy to. Thank you.
