Energy Tax Law Alert: Economic Stimulus Package Allows Bonus Depreciation for Projects Completed in 2008
Late last week Congress passed the Economic Stimulus Package of 2008 (the Act), which President Bush is expected to sign into law this week. Although the proposed extensions of the production tax credit (PTC) and investment-based energy credit were removed from the bill before it was passed, the final version of the Act does contain a bonus depreciation provision that could provide significant economic benefit for certain renewable energy projects that are acquired and placed in service in 2008.
To qualify for bonus depreciation, property that is part of a renewable energy project must satisfy the followng four criteria: (i) the property must have a recovery period of 20 years or less under normal tax depreciation rules, (ii) the original use of the property must commence with the taxpayer seeking to claim the deduction, (iii) the property generally must be acquired during 2008 and no written binding contract for the acquisition must have been in effect before 2008, and (iv) the property must be placed in service during 2008 (or, in certain limited cases, 2009).
If property meets these requirements, the owner is entitled to deduct 50 percent of the adjusted basis of the property in 2008. The remaining 50 percent of the adjusted basis of the property is depreciated over the ordinary tax depreciation schedule. Thus, for example, the portion of a wind project that qualifies for five-year MACRS depreciation may qualify for a total first-year depreciation deduction of 60 percent or 52.5 percent, depending on when during the year the facility is placed in service (50 percent bonus depreciation plus normal first-year depreciation for the remaining 50 percent of the adjusted tax basis). This is similar to the bonus depreciation that was allowed for certain depreciable property that was placed in service following September 11, 2001 and in 2004 and 2005.
The bonus depreciation rules do not override the depreciation limitation applicable to projects qualifying for the energy-based investment credit (generally solar projects). Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies. Nevertheless, the increased first-year depreciation may substantially improve the economic benefits available to an investor in a solar project.
If you have questions regarding the foregoing or any other aspect of the Act, please contact one of the attorneys listed below.
IRS Circular 230 notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.
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