The 100% Depreciation Bonus

The 100% Depreciation Bonus

March 31, 2011

The 100% depreciation bonus may prove illusory for many renewable energy projects.

The Internal Revenue Service is working on guidance that it hopes to issue in March.

A number of issues are in play that, depending on how they are decided, could make it hard for renewable energy developers to get much value from the bonus or even to claim it at all.

Congress voted as part of a bill extending Bush-era tax cuts in December to allow companies to deduct the full tax basis of new equipment placed in service after September 8, 2010 through 2011 or 2012, depending on the equipment.

Equipment that would be depreciated otherwise over five or seven years must be in service by December 2011 to qualify for a 100% bonus. It qualifies for a 50% bonus if placed in service in 2012. Examples are wind turbines and solar modules. A 50% bonus means that half the tax basis can deducted immediately and the other half is depreciated normally.

Equipment that would be depreciated over 15 to 20 years qualifies for a 100% bonus if completed by December 2012 and a 50% bonus if completed by December 2013. Examples are gas- or coal-fired power plants and some interties at wind and solar facilities.

A 100% bonus is worth 4.45¢ per dollar of capital cost at a wind farm or solar project. It is worth as much as 18¢ per dollar of capital cost at a combined-cycle gas or coal-fired power plant.

Four key issues are in play.

One is whether a project qualifies for the 100% bonus if a binding contract was signed with a turbine or module manufacturer or balance-of-plant construction contractor on or before September 8, 2010.

The depreciation bonus has been in the US tax code off and on since shortly after September 11, 2001. It was originally 30% and then was increased to 50% before the latest round when it went up to 100% as an additional economic stimulus measure urged on Congress by the Obama administration. The IRS has always divided projects into two categories: those that are “self constructed” and those that are “acquired.” Almost all power projects are considered self constructed. The bonus is supposed to be a carrot to induce companies to make new investments. There is no need to give the carrot to a project to which the developer was already committed before the bonus was available. For a self-constructed project, the IRS has always been considered the project too far along if the developer “incurred” more than 10% of the total project cost before the date the carrot became available.

The second issue is the key date to use for the 100% bonus. The IRS is unsure whether it is September 8, 2010, when President Obama first proposed the 100% bonus in a campaign speech, or January 1, 2008, when the 50% bonus was restored to the US tax code to stimulate the faltering economy as it was headed into the most recent recession. What Congress did in December was to increase the size of a carrot that was already on offer as of January 1, 2008.

The third issue is, assuming a project qualifies for a bonus, should it only get the 100% bonus on costs “incurred” after September 8, 2010 and a 50% bonus on costs incurred between January 1, 2008 and September 8, 2010?

The last issue is whether companies that qualify for a 100% bonus should be given the option to take a 50% bonus instead.

The analysis for the 50% bonus is different than for the 100% bonus, so a project that the IRS decides does not qualify for a 100% bonus because the developer was committed too early to the project may still qualify for a 50% bonus.

Keith Martin