Tax Act May Spur More Investment in RNG, Biogas Projects

The Renewable Fuel Standard is the primary federal policy that drives development of renewable natural gas (RNG) projects. Since the advent of the RFS’s modern cellulosic biofuel provisions in 2014, new investment in RNG projects has grown steadily.
By Doug Lamb and Durham McCormick | March 07, 2018

The Renewable Fuel Standard is the primary federal policy that drives development of renewable natural gas (RNG) projects. Since the advent of the RFS’s modern cellulosic biofuel provisions in 2014, new investment in RNG projects has grown steadily. The number of online RNG projects has increased from approximately 45 in early 2015 to at least 65 by the end of 2017, with another 21 presently under construction, according to the Coalition for Renewable Natural Gas.

The RNG industry made these gains despite the 2016 expiration of a host of temporary tax provisions designed to spur renewable energy development, including the Section 45 production tax credit for nonwind renewable energy technologies such as landfill gas projects, the second-generation biofuel credit, and the tax credit for alternative fuel vehicle refueling property.

While the tax code is clearly not responsible for a bulk of the current boom in RNG, the recent tax reform signed into law at the end of 2017 may very well be an additional catalyst to help spur RNG investment to new heights.

The Tax Cut and Jobs Act, H.R. 1, reduces corporate and individual tax rates. It provides noncorporate owners a new, 20 percent deduction for qualifying business income for pass-through entities. But it is the Tax Act’s less-known provisions that may make the difference for owners and developers of biogas and RNG projects.

First, the recently enacted tax bill provides for 100 percent bonus depreciation. This new provision allows businesses to fully deduct the cost of new equipment or other depreciable property with recovery periods of 20 years or less. To qualify for 100 percent bonus depreciation, the qualified property must have been acquired after Sept. 27, 2017, and be placed in service before Dec. 31, 2022.  After 2022, bonus depreciation is reduced by 20 percent each year, until fully phased out at the end of 2026.

Additionally, 100 percent bonus depreciation can also be claimed on “used” property that is new to the taxpayer (and not acquired from a related entity), which will allow acquisitions of existing facilities to claim 100 percent bonus deprecation. Watch for RNG facilities changing owners in 2018 and beyond, as investors look to take advantage of the new rules. 

For biogas and RNG facility owners, 100 percent bonus depreciation means a new ability to receive major tax advantages when they purchase new or used equipment to upgrade their facility. New tax-favored investments in treating equipment, for instance, can be used to convert an on-site electric project to a RNG project selling gas into the transportation fuel market. Other tax-favored investments might include equipment that improves plant efficiency, or greater gas flow from well-field collection.

Second, new net operating loss (NOL) provisions provide added value in future years. While NOLs can now only be used to offset up to 80 percent of taxable income, without any ability to carry back NOLs to prior tax years, unused NOLs can be carried forward indefinitely. This means losses incurred in the construction or retrofit of a RNG facility one year can provide tax benefits in future, more profitable years.

Third, H.R. 1 gives and takes away as it eliminates several tax advantaged financing provisions. The canceled Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds previously provided numerous options for financing landfill gas to electricity, biogas production and related projects. New opportunities arise, however, as the Tax Act also eliminates the corporate alternative minimum tax. This provides a significant marketability enhancement for private activity bonds, including solid waste disposal and sewage disposal bonds that are often used for biogas and RNG projects.

The Tax Cuts and Jobs Act added a new financing feature named “Opportunity Zones.”  Gains on investments in funds using the investments for certain purposes in these opportunity zones are eligible for deferral of gain recognition for up to nine years (and possibly longer in some cases, for certain long-term investments). The funds must be certified by the U.S. Treasury. The zones are required to be designated in each state by its governor, and are based off the low-income census tract data similar to that used for, among other things, new markets tax credits.

These recent changes in tax law will have an impact for RNG project stakeholders.  Developers and investors looking to acquire or upgrade RNG and biogas projects should find plenty to like in the Tax Act in 2018 and beyond. 

The Treasury will issue further guidance on these and other tax policy changes that were included in the Tax Cuts and Jobs Act.  RNG stakeholders should stay abreast of this forthcoming guidance to ensure they are optimally positioned as the provisions from the tax reform bill take effect.

This article was written with support by the Coalition for Renewable Natural Gas. The legal changes summarized are presented merely to alert the reader to the existence of such changes only, intentionally without citation. Significantly, the foregoing information does not constitute legal advice and any use of this information is subject in all respects to the advice of any user’s tax advisor.

Contact: Marcus Gillette
Director of Public Affairs, Coalition for Renewable Natural Gas