Depreciation bonus rules that the Internal Revenue Service issued in late March were more favorable to project developers than expected.

Congress voted last December as an additional stimulus measure to allow a 100% “depreciation bonus” to be claimed on new equipment put into service after September 8, 2010 through December 2011 or 2012, depending on the equipment. That means the owner can deduct his full tax basis in the equipment immediately in the year the equipment goes into service. He gets no other depreciation.

A 100% bonus is worth 4.45¢ per dollar of capital cost for wind, solar and geothermal projects. It is worth 18¢ per dollar of capital cost for coal-fired and combined-cycle gas-fired power plants.

Wind, solar and geothermal projects have until December 2011 to be completed to qualify for a 100% bonus. Coal- and gas-fired power plants have until December 2012.

There had been fears that the 100% bonus would prove illusory for most power projects.

The fear was that the 100% bonus could not be claimed on projects on which work was too far advanced last September 9 when the 100% bonus took effect.

The IRS said in late March that even if a project was too far advanced, the owner can still claim a 100% bonus on the portion of the work completed after September 8, 2010 in most cases.

It also made it easier to conclude that a project was not too far advanced and to treat tax basis as building up after September 8 when the bonus increased to 100%.

A project on which a 100% bonus cannot be claimed should still qualify for a 50% bonus. A 50% bonus means that half the tax basis can be deducted immediately and the other half is depreciated normally.

To qualify for a bonus, a project cannot have been too far advanced before a key date.

That date is September 9, 2010 for the 100% bonus. It is January 1, 2008 for the 50% bonus.

The IRS said that it will interpret the 100% bonus in a way that makes it easier to conclude that a project was not too far advanced before last September 9.

The rules are complicated.

They differ depending on whether the developer is “acquiring” or “self constructing” the project.

Most utility-scale power plants are considered “self constructed.” A power plant is self constructed, even though the developer hires a contractor to build it, as long as the construction contract was “binding” before worked started on the project and the contract is not later substantially amended during construction.

A self-constructed project was too far along if construction started before the key date.

However, a developer can take the position that construction did not start until more than 10% of the project costs were incurred. Even then, the IRS said it will take a liberal approach for the 100% bonus of allowing a 100% bonus to be claimed on costs incurred for components after September 8, 2010, provided the project is completed by a deadline.

The deadline is December 2011 for equipment like wind turbines, solar panels and landfill gas generators that would otherwise be depreciated over five or seven years. It is December 2012 for equipment like gas- or coal-fired power plants or some interties at wind and solar projects that would otherwise be depreciated over 15 or 20 years.

A developer who wants to claim a 100% bonus on components, even though work on the larger project started too early, can do so by including a statement with his tax return for the year the project is placed in service.

Equipment that a developer “acquired” — as opposed to self constructed — does not qualify for a 100% bonus if it was acquired before September 9, 2010. An example might be rooftop solar panels, depending on the facts. However, the panels are not considered acquired until the costs are incurred. Costs are “incurred” only by taking delivery, with one exception. They may be incurred by making payment in cases where payment is made and delivery is reasonably expected within 3 1/2 months of payment.

The following examples show how the rules work in practice.

Suppose a wind developer signed a binding turbine supply agreement in 2009 to order turbines for a project on which significant physical work commenced at the site in December 2010. The project is self constructed. The entire project qualifies for a 100% bonus provided it is completed by December 2011. If it is not completed until 2012, then it qualifies for a 50% bonus, with two exceptions. Individual turbines that go into service in 2011 qualify for a 100% bonus, and it is possible that part of the intertie qualifies for a 100% bonus even if completed in 2012.

Suppose instead that significant physical work started at the site in August 2010. The developer may still be able to take the position that construction did not start until after September 9 if no more than 10% of the costs were incurred before September 9. Each turbine, pad and tower is considered a separate project.

Suppose that the project was too far along before September 9: it was under construction too soon. The developer can still take a 100% bonus on the costs incurred on or after September 9. Costs are not ordinarily incurred until delivery.

Another issue on which the market had been awaiting guidance was whether a company can choose not to take a 100% bonus on equipment that qualifies and take a 50% bonus instead.

The IRS said it will allow such a choice for projects put into service in 2010 but not in 2011 or 2012. It is the 100% bonus or nothing for projects put into service in 2011 or 2012 if they qualify otherwise for a 100% bonus. However, elections to opt out entirely can be made selectively just for all the 5-year property put into service in 2011, for example, while keeping a 100% bonus on the rest of the project. A new election can be made each year.

Many renewable energy developers have had difficulty persuading tax equity investors to take any bonus. The tax equity market remains short on tax capacity. Many tax equity investors would prefer to spread their scarce tax capacity over a larger number of transactions. In addition, depreciation, including the bonus, is viewed a timing benefit that does not add to earnings, unlike tax credits.

Keith Martin