COVID-19 and the resulting Corona Virus Aid, Relief, and Economic Security Act (CARES Act) have created a window of opportunity for investors in renewable energy projects. In addition to providing health care support and economic relief to businesses and workers affected by the pandemic, the CARES Act also offers tax relief to corporate and individual taxpayers.
For renewable energy investors to fully benefit from the available relief, they must act quickly—the window of time is small, and the qualifications require underlying renewable energy investment assets to be placed in service before the end of 2020.
Below are four key CARES Act provisions that could provide considerable benefits to renewable energy investors, as well as key requirements of each provision.
Five-Year Carryback of Net Operating Losses
The 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA), contained sweeping changes to the federal tax code that significantly impacted the renewable energy sector. One of those changes was the disallowance of the net operating loss (NOL) carryback rules.
However, under the CARES Act, corporations and individuals that generated NOLs in 2018, 2019, and 2020 can now carry those NOLs back to the five preceding tax years.
The ability to carry back NOLs as far back as 2013 can be extremely valuable, especially for corporate taxpayers. The maximum corporate tax rate applicable to tax years ending before 2018 was 35% compared to the current rate of 21%.
For individual taxpayers, the five-year carryback provides a unique opportunity for investors to take tax off the table in earlier years and receive an immediate cash refund.
80% NOL Limitation Suspension
In addition to disallowing NOL carrybacks, the TCJA also imposed an 80% limitation on NOLs arising in taxable years beginning after 2017. Under TCJA, the NOL deduction in any post-TCJA year was limited to 80% of taxable income.
The CARES Act repeals the 80% taxable income limitation for tax years beginning before 2021.
Excess Business-Loss Limitation Postponement
Individual investors already had to navigate the passive activity loss limitation and at-risk rules when investing in renewable energy projects. However, the TCJA created a new layer of limitation disallowing losses in excess of $250,000, or $500,000 for joint filers, that applied to tax years beginning in 2018.
Under the CARES Act, the excess business loss (EBL) rules are suspended for noncorporate taxpayers for tax years beginning before 2021 including retroactive suspension of 2018.
Interest Limitation Increase
The TCJA created a new limitation on business interest expense that applied for years after 2017. The limitation was generally the excess of interest expense over 30% of a taxpayer’s adjusted taxable income (ATI).
Through 2021, ATI is computed as taxable income before interest, depreciation, and amortization, generally making ATI equivalent to earnings before interest, taxes, depreciation, and amortization (EBITDA). For years beginning in 2022, ATI is defined as taxable income before interest, generally making ATI equivalent to earnings before interest and taxes (EBIT).
Under the CARES Act, the limitation amount increases from 30% to 50% for 2019 and 2020. Partnerships, however, remain subject to the 30% limitation for tax years beginning in 2019.
In addition, all taxpayers—including partnerships—may elect to use their ATI for a tax year beginning in 2019 to compute their Section 163(j) interest deduction limitation for their tax year beginning in 2020.
Partners who are allocated excess business interest expense (EBIE) for tax years beginning in 2019 may deduct 50% of that EBIE in tax years beginning in 2020. The remaining 50% of the 2019 EBIE is subject to the normal Section 163(j) rules, meaning it’s carried forward to tax years when the partner is allocated sufficient excess taxable income (ETI) from the partnership.
The CARES Act provides the potential for increased deductions and NOL carryback opportunities, but taxpayers may need to amend 2018 and 2019 returns to benefit from the provisions for those years.
For 2020, however, there’s a soon-to-be-closing opportunity for taxpayers to invest in renewable energy projects and fully benefit from the temporary relief provisions provided by the CARES Act. For example, a taxpayer may be able to generate a NOL in 2020 that can be carried back five years, or to 2015, if the taxpayer invests in a renewable project in which:
- The underlying assets are placed into physical operation before the end of 2020
- The eligible renewable energy equipment—such as solar energy equipment—qualifies for immediate expensing or bonus depreciation
To generate a NOL in 2020, the bonus depreciation and enhanced deductions must exceed a taxpayer’s current-year income. Any NOL not absorbed in 2015 would carry over to each successive tax year.
Additionally, any credits—such as investment tax credits or production tax credits—that are generated in 2020 but can’t to be used in 2020 because the taxpayer generated a NOL in the same year, would be available for a one-year carryback to 2019 under currently existing rules for general business credit carryovers. Of course, individual taxpayers and certain closely held corporations need to navigate the existing passive-activity and at-risk rules.
If a taxpayer is able to absorb 2018, 2019, and 2020 NOLs and credits through carryback claims to earlier years, not only would the claims provide immediate cash refunds, they’d free up the taxpayer’s ability to absorb tax benefits in years beyond 2020—truly making 2020 a unique opportunity for investing in renewable energy.
We’re Here to Help
To learn more about how you or your business can benefit from changes introduced by the CARES Act, contact your Moss Adams professional.