Federal, State Tax Laws Boost Data Centers’ Return-on-Investment

The US is experiencing a data center boom with a massive pipeline of new construction. In the last decade and a half, data centers have transformed from mostly supporting traditional tech-based workloads to supporting the introduction and integration of artificial intelligence into business operations.

The capital requirements of a modern build-out, and the energy needed to sustain operations, have prompted companies using AI to evaluate and optimize tax efficiencies so they can maximize their investment. While grid sustainability is a key factor for selecting a data center’s site, the largest data center developers are supplementing their own energy supply by installing renewable energy assets.

Mainstream tech firms such as Amazon.com Inc., Apple Inc., Alphabet Inc.'s Google, Meta Platforms Inc., and Microsoft Corp. have already amassed about half of the global renewable energy capacity to support business and data center operations. Amazon, Google, and Microsoft also have explicitly promised to make their data centers run on 100% renewable energy, creating a scalable model for other developers desiring energy-independent facilities.

In addition to meeting a data center’s energy needs, renewable energy assets can sell power back to the grid and generate federal tax credits, further optimizing deployed capital.

For instance, Section 48E of the Internal Revenue Code allows for a credit of 30% to 70% of the total investment of a renewable energy asset such as a utility-scale solar farm and/or battery energy storage system. Section 45Y allows for a federal tax credit of up to 3 cents for every kilowatt hour of energy produced and sold from a renewable energy asset, such as a wind turbine farm.

Sophisticated developers are now integrating multiple renewable energy assets into single facilities to create dynamic energy ecosystems. Calibrant Energy is constructing a 23-megawatt-hour battery energy storage system, or BESS, at its New Jersey data center. The data center already has a 7.2-MW rooftop solar energy system installed; the BESS will store energy during facility downtime and will either sell energy back to the grid or use that stored energy during increased workloads.

While Calibrant is just one recent example of deploying a renewable asset stack, it underscores the opportunity to achieve both capital and energy efficiencies at once.

Transferability under Section 6418 allows for these federal tax credits to be sold at a discount upon installation, as opposed to realizing full credit value after filing a tax return, which fast-tracks capital return by up to 18 months. Depending on financial considerations, a tax credit sale could be more capital-efficient than a tax liability reduction.

The 2025 federal tax law further improved investment turnover with a 100% permanent bonus depreciation for property with 15 years or less useful lives. Equipment can equate up to 70% of a facility’s costs in some cases, and cost segregation studies can optimize federal tax classifications of equipment to maximize bonus deprecation in the first year of operation. Drastically reduced tax liabilities free up capital and can speed up investment return exponentially.

Leading developers are successfully leveraging state and local development programs to further improve project economics and total cost of ownership. Improved economics can be sourced from many areas, including property tax abatements, sales tax exemptions, negotiated sales tax rebates, payment-in-lieu-of-taxes programs, and infrastructure solutions such as tax increment financing.

Virginia is most favorable to data centers, offering a full sales tax exemption, property tax reductions up to 80%, and negotiated energy rates with discounts ranging from 10% to 20%. Nevada offers up to a 75% property tax abatement for up to 20 years but requires the governor’s approval for a 2% sales tax reduction on data center equipment. Conversely, Texas offers a full sales tax exemption and a 50% or 75% property tax abatement for 10 years, depending on location.

While incentives or completed negotiations aren’t usually made public, major data center construction in these three states further highlights the attractiveness to developers and overall effectiveness of the incentives.

Virginia issued 54 permits for new data centers in 2025, 28 of which were for Amazon facilities. Google has invested more than $2 billion in Nevada data center development since 2019, and Vantage began its $3 billion Nevada facility in 2025. Meta has announced an additional $10 billion investment in Texas, which will be constructed at the same time as CyrusOne’s $1.2 billion facility.

If planned and handled properly, data center developers and tenants can achieve an extremely low indirect tax rate in many jurisdictions. Getting this right up front and negotiating favorable terms will drive development in this highly competitive market.

While not every jurisdiction will be favorable to data centers, capital-heavy projects can generate enough interest and competition among jurisdictions for sites election so that developers can drive capital efficiencies through state and local incentive negotiations.

As efficiencies and capabilities continue to improve and new technologies are developed, the capital and energy requirements of data centers will increase proportionally. Successful developers will be the ones who maximize the efficiencies of every dollar in such a capital-intensive market.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ian Boccaccio is a principal and income tax practice leader at Ryan LLC in New York focused on green energy investing and tax credit transfer monetization.

Dane Ware is a CPA and senior tax consultant for Ryan LLC.

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