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Bonus Depreciation on Solar Projects – Explained

What is Bonus Depreciation?

Bonus Depreciation is good news for solar stakeholders.  This article details how the return of 50% Bonus Depreciation will impact project economics.

MACRS Depreciation on a $1 Million Solar Project

Assume you have a solar project valued at $1 million.  The taxable basis is reduced by half of the 30% Investment Tax Credit, so it is 85% of $1 million or $850,000.  Previously this would typically be depreciated using the Modified Accelerated Cost Recovery System (MACRS) according to the following five year schedule:

MACRS depreciation

Under MACRS, system owners could depreciate 20% in the first year

50% Bonus Depreciation on a $1 Million Solar Project

Under 50% Bonus Depreciation, system owners may claim depreciation of half of their solar facility after it is placed in service; the other 50% is depreciated using the normal depreciation table, in this case 5-year MACRS.* So in the first year the 50% Bonus Depreciation reduces the post-ITC Basis by half, from $850,000 to $425,000.  Now you can apply the first year 20% MACRS depreciation rate to this residual half of the basis, gaining an additional $85,000 of first year depreciation ($425,000 x 20% = $85,000).  Thereafter you continue to apply the MACRS rates to the residual half of the basis... $425,000 x 32% = $136,000 of depreciation in the 2nd year, and so on.  

Bonus Depreciation

50% Bonus Depreciation accelerates the MACRS depreciation schedule.

The Economic Impact of Bonus Depreciation

The present value of these incremental tax savings is material, but won’t make or break a commercial-scale project.  In this example, a pure Tax Equity investor might expect to see his IRR increase by almost a full percentage point.  But clever installers and project developers can capture this economic benefit; in this example a developer selling his project at NTP (Notice to Proceed) could enjoy an additional $10,000 of development fee or installation margin.

Learn more about solar policy and how to profitably develop and finance solar projects from my blog.

-Tom Millhoff

*This information is general in nature, not complete, and may not apply to your specific situation. You should consult your own tax advisor regarding your tax needs. Helio Micro Utility and its affiliates make no warranties and is not responsible for your use of this information or for any errors or inaccuracies resulting from your use.