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Tax Considerations for Data Center Projects in the Age of AI

4 min read

Tax Considerations for Data Center ProjectsArtificial intelligence is driving an unprecedented surge in data center construction. Developers, private equity sponsors and their tax advisors are navigating a complicated web of questions that touch everything from ownership structure to site selection to power sourcing. Get the early decisions wrong and the tax consequences can follow a project for years.

Why REITs Have Become the Structure of Choice

Private equity has increasingly turned to real estate investment trusts when backing data center projects. Structure a REIT correctly, and you sidestep corporate-level taxation entirely. Foreign investors get an even better deal. Sovereign wealth funds and foreign pension funds can participate without any obligation to file U.S. tax returns. Data centers, with their heavy real estate footprint, slot into the REIT framework more naturally than many other asset classes.

That said, the fit is not seamless. Related party rent rules create traps for the unwary. Public pension funds and sovereign wealth funds need to confirm they do not hold stakes in both a data center REIT and its tenant. Another wrinkle involves equipment. Data centers demand significant upfront investment in personal property that may not count as qualifying REIT assets. The tax code requires that 75 percent of a REIT’s total asset value consist of real estate, cash, and government securities at each quarter’s close. Developers often must segregate personal property until the REIT builds up enough good assets to clear that hurdle.

The Power and Water Challenge

Reliable power and water access have become one of the toughest operational problems in the industry. Demand is so intense that many developers are generating their own electricity on-site. The tax treatment of these co-located power facilities depends heavily on the energy source and delivery method. Get it wrong, and the generation asset may not qualify for REIT treatment.

Solar photovoltaic systems sit on relatively solid ground under existing guidance. Nuclear and natural gas, which many see as the next wave of data center power, do not. Current rules leave significant uncertainty around whether these sources can work within a REIT structure.

Legislative and Executive Developments

The IRS priority guidance plan for 2025 and 2026 contains no projects aimed squarely at data centers. Regulation section 1.856-10(g), finalized in 2016, includes an example analyzing customized electrical and telecommunications systems in a data center context, but practitioners continue pushing for clearer rules on alternative energy.

Congress may offer relief on the waterfront. In April 2025, Representative Darin LaHood of Illinois proposed a new section 48F that would provide a 30 percent credit for qualifying water reuse projects, including on-site recycling systems at data centers. With U.S. data centers projected to consume 33 billion gallons of water by 2028, the bill attracted 21 cosponsors and bipartisan support.

The White House has made its priorities clear as well. The Trump administration’s July 2025 AI action plan established a goal of achieving global dominance in artificial intelligence, with infrastructure as one of three pillars. An executive order, issued July 23, 2025, focused specifically on reducing federal regulatory obstacles to data center construction.

Conclusion and OBBBA Incentives Worth Watching

Several provisions in the One Big Beautiful Bill Act benefit data center projects, even though lawmakers did not design them with that sector in mind. The return of 100 percent bonus depreciation under section 168(k) matters enormously for an industry requiring massive capital outlays.

Rural Opportunity Zones sweeten the economics further. Investments in qualified rural opportunity funds now qualify for a 30 percent basis step-up after five years, triple the 10 percent available in standard zones. A special rule targeting improvements to existing structures in rural areas cuts the substantial improvement threshold to 50 percent of adjusted basis, compared to more than 100 percent for non-rural funds.

Developers and investors evaluating new projects will find that entity structure, site selection, and the shifting regulatory environment all interact in ways that directly affect the bottom line. Getting the tax picture right from the start remains essential.

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Understanding the EV/2P Ratio

3 min read

What are the EV/2P RatioWhen it comes to raw materials, especially for fossil fuels, it’s essential to evaluate existing and potential production capabilities for such companies. Using the EV/2P Ratio is a powerful tool when evaluating fossil fuel-related companies.

Defining the Ratio

This ratio is calculated by dividing a business’ enterprise value into the company’s reserves. It provides financial analysts, investors and internal business stakeholders with a snapshot of a company’s reserves and the business’ likelihood of preserving operation growth. This standardizes valuations, thereby allowing analysts to compare company-to-company financials.

How to Calculate EV/2P

Enterprise Value (EV) / Total 2P Reserves

Defined as: Enterprise Value = Equity (open market price) + Debt (open market price) – Cash and Cash Equivalents

2P = Proven and Probable Reserves

Illustrating the Calculation

If a company’s capitalization is $300 million and debt consisting of $225 million, along with $30 million for proven reserve value, $20 million in probable reserves, and $25 million in possible reserves, the company’s resulting enterprise value becomes:

$300 million + $225 million = $525 million

The 2P reserves is:

$30 million + $20 million = $50 million

Plugging the numbers into the original formula, it’s: $525 million / $50 million = 10.5x (multiple)

Based on the resulting 10.5 multiple, this ratio provides a current valuation that translates to for every $1 in 2P reserves equals $10.50 of a market valuation.

Reserves are how internal/external stakeholders value the production/growth potential of oil/gas companies. It’s broken down into two categories:

1.) P1 are proven reserves, which are the highest caliber reserves. There’s at least a 9 in 10 percent likelihood (or more) of recoverable reserves. It’s also known as P90.

2.) Probable reserve (also known as P50) has an even chance of either non-recoverability or realized recoverability. This is the next best, but a lesser grade than P1.

These two resource categories are referred to as 2P.

Putting it in Perspective

Depending on the company’s calculated EV/2P Ratio, the business owner or investor can determine a course of action to take.

If it’s higher, it’s more highly valued than its competitors based on the same level of 2P reserves; therefore, the company’s shares are more expensive against its peers. This can give investors pause because other undervalued stocks are more attractive due to a higher likelihood they’ll appreciate.

However, if a company is valued higher, but the company is more efficient or a higher performer, investors also may be interested because its production and earnings justify the higher valuation. That’s why looking at the metric in a silo is not effective.

Debt Concerns

When it comes to debt and analyzing this ratio, fossil fuel businesses are often highly levered since they use massive sums of debt for research and development and continued operations.

Since the EV value looks at debt and equity concurrently, analyzing a company’s capital structure is essential when comparing companies’ valuations. Essentially, if a company has too much debt and if interest rates suddenly increase or it can’t service debt if the price of crude plummets, it may run into debt servicing issues.

While this ratio is effective in providing a level playing field for analytical uses, it’s important to remember that it needs to be used in conjunction with comprehensive financial analysis.

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Stalemates in Voting Rights and ICE Legislation; Small Business Funding Expanded

4 min read

Stalemates in Voting Rights and ICE Legislation; Small Business Funding ExpandedSafeguard American Voter Eligibility Act (S 1383) – Also known as the SAVE America Act, this bill passed in the House on Feb. 11 but stalled in the Senate due to the Democrat filibuster. The bill would require states to verify documentary proof of citizenship and current residential address when Americans apply for federal voter registration. The easiest documentation would be a birth certificate or passport that confirms their current legal name (most women change their last name after marriage, so they require additional documentation, such as a marriage certificate). However, research from the Bipartisan Policy Center found that nearly 1 in 10 registered voters do not have access to their birth certificate, and 52 percent do not have an unexpired passport with their current legal name. Note that these registration requirements kick in any time current voters update their registration, such as for an address change or to switch political party affiliation. The bill also requires a specific type of photo ID to cast a ballot. A driver’s license is acceptable, but not student IDs or a tribal ID that lacks an expiration date (which tribal IDs do not contain). The president is also insistent that the legislation include unrelated restrictions for transgender Americans. The debate over this bill continues in the Senate.

Department of Homeland Security Appropriations Act, 2026 (HR 7744) – This is the bill that has held up appropriations for the Department of Homeland Security (DHS) for the fiscal year ending Sept. 30, 2026. The bill was introduced by Rep. Tom Cole (R-OK) on March 2 and passed in the House on March 5. However, it triggered a partial government shutdown and is under heated debate in the Senate. Republicans insist on passing the complete bill with increased funding for national security and border protection. The legislation also includes provisions prohibiting funds for Diversity, Equity, and Inclusion and Critical Theory programs, as well as abortions and gender-affirming care for ICE detainees. Senate Democrats are seeking to include guardrails that would prohibit ICE agents from wearing masks or entering homes, schools, hospitals, etc., without a judicial warrant. Currently at a stalemate, Republicans will likely try to pass funding for the Department of Homeland Security (DHS), more money for ICE, and components of the Save America Act through a budget reconciliation bill.

Small Business Innovation and Economic Security Act (S 3971) – On March 3, Sen. Joni Ernst (R-IA) introduced this bipartisan bill to reauthorize the Small Business Innovation Research and Small Business Technology Transfer (SBIR/STTR) programs. These programs, also known as America’s Seed Fund, expired last September. The new bill enables certain agencies to award a portion of their funds to larger projects focused on technology transition, rather than incremental R&D. These agencies, which include the Departments of Defense, Energy and Homeland Security, the Environmental Protection Agency and the National Aeronautics and Space Administration, may award up to $30 million to small business projects that prioritize national security, customer demand and undercapitalized technology areas. The bill passed in the Senate on March 3, the House on March 17, and was signed into law by the president on April 13.

Tyler’s Law (S 921) – The purpose of this bill is to issue guidance for hospital emergency departments to implement fentanyl testing as a routine procedure for patients experiencing an overdose. The current standard procedure tests for marijuana, cocaine, amphetamines, PCP, and natural and semisynthetic opioids, but not synthetic opioids like fentanyl – something many ER practitioners are unaware of. The bill is named for Tyler Shamash, a California teenager who died of an overdose after he passed a drug test in an emergency room that did not include fentanyl. The bipartisan bill was introduced by Sen. Jim Banks (R-IN) on March 10, 2025. It passed in the Senate on March 23, 2026, and is currently awaiting a vote in the House.

To require the Secretary of Homeland Security to designate Haiti for Temporary Protected Status (HR 1689) – This bill was introduced on Feb. 27, 2025, and passed in the House on April 16, 2026. Amid rampant immigration enforcement, this bill is designed to extend temporary protected status for Haitian migrants through 2029. TPS is intended to provide a safe haven for foreign nationals whose home countries are experiencing temporary unsafe conditions, such as from a natural disaster or civil unrest, for which Haitians continue to qualify. This largely partisan legislation faces an uphill battle in the Senate, as well as a likely veto by the president. In February, the president revoked TPS status for approximately 330,000 Haitians in the United States. However, enforcement of that order is currently halted, and its constitutionality is under consideration by the U.S. Supreme Court.