Bonus Depreciation and MACRS Schedule

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Let’s talk Depreciation.

It’s the significant “other” benefit available to for-profit entities doing renewable energy improvements on their properties. It can amount to around 15% of the project value (depending on the tax bracket of the claimant), so it is significant when forecasting cashflow over the first few years of the proposed solution. What’s at stake here is when and how much of that depreciation you can take in the first year. The impact could be meaningful for projects already returning tight cashflow analyses.

The 2022 Inflation Reduction Act (IRA) reset the clock on the way to depreciate renewable energy (and many other) investments into hard assets, but a new clock began ticking impacting accelerated depreciation, prevailing wage requirements and other important aspects of costing calculations for such expenditures.

Here, let’s look at how the new depreciation schedule favors the early bird looking for that tax worm.

Currently, depreciation of solar, energy storage, wind energy and many other qualifying investments is using two primary methods concurrently:

Bonus:
A category of depreciation known as “accelerated”, bonus depreciation allows a business to write off all or part of an asset’s cost in its first year of use. But it is a disappearing act.

As of IRA’s inception, a company could write off 100% of qualified equipment costs (cost – ITC value/2) via bonus depreciation in 2022. This percentage dropped to 80% in 2023, 60% in 2024, and 40% in 2025, until its wholly phased out in 2028.

So, in 2024, a $1Million project will be able to immediately depreciate ((Project value – ITC/2) * 60%) = $510k , or $170k less than in 2023.

The remainder of the value will then be eligible for MACRS depreciation.

MACRS:
This is the method that is used to depreciate the balance of the allowed amount.

A number of renewable energy technologies are classified as five-year property (26 USC § 168(e)(3)(B)(vi)) under the MACRS, which refers to 26 USC § 48(a)(3)(A), often known as the energy investment tax credit or ITC to define eligible property. Such property currently include:

• a variety of solar-electric and solar-thermal technologies
• fuel cells and micro-turbines
• geothermal electric
• direct-use geothermal and geothermal heat pumps
• small wind (100 kW or less)
• combined heat and power (CHP)
• the provision which defines ITC technologies as eligible also adds the general term “wind” as an eligible technology, extending the five-year schedule to large wind facilities as well.(source)

The modified accelerated cost recovery (MACRS) allows businesses to recoup part of these costs more quickly than through a normal depreciation schedule. This schedule can run 5 or 6 years (depending on when in the federal fiscal year the equipment was placed n service), with over 50% of the total depreciable amount applied in the first two years. So, in addition to the first year bonus depreciation, the first year of MACRS also provides a depreciable value.
Source: Bloomberg tax

In conclusion:
Per the above schedule, companies electing to install solar in successive years will not lose any deduction value over installation in 2023. But they will lose an increasing portion of the amount they can deduct in the first year.

Note that CleanFi does not calculate depreciation on our finance quoting platform.