Impact of the 1986 Tax Reform Act on investments in wood biomass energy systems

Abstract

The Tax Reform Act of 1986 drastically altered the business tax structure of the United States. This paper examines the magnitude and scope of these tax changes and their impact on three basic types of investment in biomass energy systems: (1) a replacement facility, (2) a retrofit, and (3) the addition of a cogeneration turbine. The paper examines the economic feasibility of these three biomass projects (adapted from real case studies) before and after implementation of the Tax Reform Act of 1986 using the effects on net present value and internal rate of return criteria. Individual changes in the tax code applicable to biomass energy systems are reviewed and the impact of each on the net present value and internal rate of return of the three projects is quantified. The results indicate that the Tax Reform Act was not as devastating to biomass projects as originally perceived and that some projects capable of generating large annual savings may actually benefit from the tax law changes.