One Big Beautiful Bill and MLP/Midstream Implications

Summary

Broadly, the One Big Beautiful Bill Act (OBBBA) tilts positively for oil and gas and midstream, while creating challenges for wind and solar.
For businesses, including energy infrastructure, bonus depreciation and a higher interest expense deduction limit are generally positive.
Of note for MLPs, the OBBBA makes permanent the 20% Qualified Business Income deduction that was set to expire at the end of this year. The OBBBA also expands qualifying income for MLPs.

With the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, this note briefly discusses some of the implications for energy broadly and the energy infrastructure space. A few provisions are particularly topical for MLPs, while others like bonus depreciation have broader implications for midstream and other industries.

Broad energy implications.

For oil and gas in general and midstream/MLPs, the provisions of the OBBBA are largely positive. The act tends to be favorable for oil and gas, including requirements for regular onshore and offshore lease sales. The OBBBA is less favorable for wind and solar, pulling back on some of the incentives included in the Inflation Reduction Act. Headwinds for wind and solar generally tend to be beneficial for natural gas. That said, the bill was also supportive of other energy solutions like nuclear, hydrogen, geothermal, and battery storage, as well as carbon capture.

For wind and solar, the final bill was not as bad as potentially feared, but it does present challenges. Namely, wind and solar projects must begin construction within the next 12 months or be completed by the end of 2027 to be eligible for tax credits. This shortens timelines for project developers. As another challenge, projects will have to comply with foreign ownership and sourcing rules to be eligible for tax credits.

Meanwhile, the residential clean energy credit is terminating at the end of this year, presenting a headwind for residential solar. Clean vehicle credits are also sunsetting. One bright spot for renewables was the extension of the clean fuel production tax credit from the end of 2027 to the end of 2029, with renewable natural gas a beneficiary. For more on the impact for renewables, view the links above. The balance of this note focuses on tax and accounting items.

100% bonus depreciation made permanent

For midstream and other capital-intensive industries, the bonus depreciation provisions in the OBBBA are arguably positive. The OBBBA makes permanent the 100% first-year depreciation bonus for qualified property acquired and put into service after January 19, 2025. For midstream corporations, higher depreciation should result in lower cash taxes. For MLPs, greater depreciation would lower net taxable income for unitholders and result in a greater percentage of the distribution being a tax-deferred return of capital (all else equal).

On their 4Q24 earnings call in February, management from Williams (WMB) estimated that restoration of 100% bonus depreciation could cut in half their 2025 estimated cash taxes of $300 million. Management noted that bonus depreciation could be really impactful, especially in a period of significant capital investments. Non-pipeline investments like behind-the-meter power solutions and gathering expansions are examples of projects that would qualify for bonus depreciation.

Higher limit for interest expense deductions

The OBBBA raises the limit for the amount of business interest expense that can be deducted in a taxable year under Section 163(j). This is positive for businesses, including midstream.

Generally, the deduction for interest is capped at 30% of adjusted taxable income. Prior to 2022, adjusted taxable income was calculated on an EBITDA basis. Beginning in 2022, adjusted taxable income was calculated on an EBIT basis. EBIT is lower than EBITDA, so the cap on the interest expense deduction was lower.

The OBBBA permanently changes the calculation from EBIT to EBITDA for 2025 and beyond. With the higher cap, the limit may become more of a moot point (i.e., most companies probably won’t have interest expense that is more than 30% of EBITDA). The OBBBA also puts in place a capitalized interest ordering rule. This means the interest expense deduction limitation must be calculated before factoring in any interest capitalization provisions, with a few exceptions.

MLP-specific developments

Qualified Business Income deduction made permanent

The OBBBA has made permanent the 20% Qualified Business Income (QBI) or Section 199A deduction. This allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified REIT dividends and qualified income from MLPs. In President Trump’s first administration, the QBI deduction essentially preserved MLPs’ tax advantage over C-Corps as the corporate tax rate fell from 35% to 21%. Previously, the QBI deduction was going to expire at the end of the 2025.

The permanence of the QBI deduction is a clear positive for MLP unitholders. For more information on MLP taxation and the QBI deduction in practice, please see this note.

MLP qualifying activities expanded

MLPs must earn at least 90% of their gross income from qualifying sources. Since the late 1980s, this has mainly included income from the production, processing, refining, transportation, or marketing of minerals, natural resources and fuels. Over the years, bipartisan legislation has been introduced to extend the MLP structure to renewables without success (MLP Parity Act, Financing Our Energy Future Act). The OBBBA makes some headway on this front.

Specifically, the OBBBA expands qualifying income for MLPs to include income from activities related to hydrogen, certain biofuels and alcohol fuels, sustainable aviation fuel, carbon capture, advanced nuclear, hydropower and geothermal energy. This applies for taxable years after 2025.

With the change, existing MLPs may be better able to pursue opportunities related to hydrogen, carbon capture, or renewable fuels if attractive projects exist now or in the future. These areas can likely leverage existing midstream capabilities. Potentially, companies focused on these new qualifying activities could look to adopt the MLP structure or go public as MLPs.

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