Tax Reform: New 100% Bonus Depreciation and Renewable Energy

    The Tax Cuts and Jobs Act (TCJA) has dramatically changed the depreciation and expensing rules for trade or business assets.  The changes may have a significant impact on the renewable energy sector. In some cases, benefitting from these changes involves a fair bit of tax complexity.

    The New Bonus Depreciation

    Under the new law, businesses1 may claim 100% bonus depreciation on what the rules now define as “qualified property.” Property that is acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. 

    Qualified property that is acquired prior to Sept. 28, 2017, but placed in service after Sept. 27, 2017, will remain eligible for bonus depreciation, but under the pre-Act law (i.e., 50 percent bonus subject to prior law phasedowns). 

    With the new law, bonus depreciation at the 100% level is also eventually phased down 20 percent each year for qualified property that is placed in service after Dec. 31, 2022, and before Jan. 1, 2027.

    Because the new law may involve assets that were under contract or under construction prior to the new law being enacted, there is a table of rules that must be consulted to ensure the correct bonus depreciation rules are being applied if the taxpayer chooses to claim bonus. Great care must be undertaken to ensure the correct rules and dates are followed. 

    NOTE: The acquisition2 date for property acquired pursuant to a written binding contract3  is the date of that binding contract. 

    Making the proper calculations can be complex, so you should seek the aid of a professional tax advisor when doing so.

    Qualified Property

    The new bonus depreciation rules define ‘qualified property’ as tangible personal property with a recovery period of 20-years or less.  

    Because the largest percentage of most renewable energy property (i.e., wind and solar) is personal property that is otherwise 5-year Modified Accelerated Cost Recovery System (MACRS) property, and because the new law did not change the general rule for wind or solar 5-year MACRS, the new 100% bonus depreciation is merely an option for wind and solar deals. 4

    Taxpayers may affirmatively elect to not claim bonus depreciation.  Doing this is known as “electing out of bonus depreciation.”  However, great care should be taken before such a tax election is made to ensure a complete understanding of the ramifications.

    The new law for bonus depreciation also makes a dramatic new change as it pertains to “used” property, and this change may have an important role to play in certain renewable energy project financings.  To the extent of its relevance in certain deals, this new rule may create new opportunities.  It also may cause certain tax equity investors to give their historic reluctance to enter partnership deficit restoration obligations a second look. 

    General Carve-Outs for New Bonus

    For the new bonus depreciation rules, “qualified property” is a legally defined term, and does not include:

    1. Property used in providing certain utility services if the rates for furnishing those services are subject to ratemaking by a governmental entity or instrumentality by a public utility commission; 
    2. Any property used in a trade or business that has floor-plan financing indebtedness; and, 
    3. Property used in a real property trade or business that makes an irrevocable election out of the interest expense deduction limitation under section 163(j). 

    Though rules No. 2 and No. 3 are typically not relevant to the non-regulated renewable energy sector, until the U.S. Congress, U.S. Treasury or the IRS issue updated tax accounting guidance, there remains some question as to what qualifies as, “subject to ratemaking,” or what type of public body meets the definition of “utility commission” in the context of a municipal EMC, or other type of non-IOU5, non-state-level commission that “regulates” such a utility.

    Bonus is Now Bigger, but is it Better for Renewables?

    In general, bonus depreciation may enhance tax minimization for certain taxpayers. For example, those with depreciable assets that are directly owned and used in their trade or business, or tax-equity partners with both a sufficient tax capacity and a federal income tax profile that enables their institution to absorb, or carryforward the bonus depreciation.  However, while bonus depreciation at first seems appealing, in the complex arena of tax equity renewable finance, it’s a timing issue with some serious federal income tax accounting complexity. Therefore, there is a “price” to pay for further accelerating the already accelerated 5-year MACRS depreciation simply to obtain an allocation of bonus depreciation tax deductions. 

    Tax Accounting Complexity

    Today’s federal income tax accounting rules often impair or prevent many partners from efficiently using their tax depreciation deductions, because of the complex interplay between federal partnership tax accounting rules and the tax-equity partnership finance structures being utilized.  Particularly when the amount of the tax depreciation deduction exceeds the partner’s tax basis in their ownership interest at the time the allocation of depreciation is made. The result is often a limit to the allocation of tax depreciation deductions that tax equity partners are willing to accept. 

    A deciding factor for claiming bonus depreciation on a renewable energy tax equity deal also hinges on the type of tax credit the partnership is claiming.  In the event the partnership can claim the section 45 production tax credit (PTC), the partners may be willing to claim bonus depreciation.  However, this generally only occurs if the tax equity partner in a PTC deal agrees to a limited deficit restoration obligation (LDRO).  For deals with the investment tax credit (ITC) the considerations differ substantially.

    This distinction arises because a DRO (and an LDRO) is a contractual obligation made by a partner where that partner expressly agrees to contribute future capital to the partnership if the project assets are liquidated and the partner’s capital account at that point is more negative than any available minimum gain. Typically, the DRO obligation is limited to any amount over and above the available minimum gain, which also means that the tax equity partner in a PTC deal will agree to limit their first years’ partnership interest profit/loss percentage so that it will match that limited DRO. After that first tax period, the tax equity partner in a PTC deal will increase their claim to 99% of the profit/loss (which will effectively help relieve any negative capital account position).  

    This structure is possible in the case of the PTC (rather than the ITC) because section 48 investment tax credit (ITC) transactions have less flexibility in this regard given the tax credit recapture rules that apply to the ITC but not the PTC. The rules that permit the ability of the tax equity investor to alter their profit/loss ratios during the first five years of the deal are far more liberal under the tax law governing the PTC than with the ITC.  

    The DROs are often used in PTC transactions because the tax equity partner must be entitled to receive 99% of the income allocation of the partnership to receive 99% of the PTCs and because of the longer 10-year statutory window for claiming PTCs. Tax equity partners have grown accustomed to using limited DROs so long as the future years’ allocations of income are projected to restore their capital account to at least zero by the flip date of the partnership-flip structure. That said, unfulfilled DROs do not directly give the tax equity partner the ability to use the related bonus depreciation deductions. Rather, the DRO merely entitles them to receive the depreciation deductions from the partnership.  

    After all the accounting rules have been applied in a situation, the use of bonus depreciation for PTC deals may help to offset the impact of the recent reduction in the overall corporate marginal tax rate by accelerating the timing of the deductions taken, and thus help to keep the tax equity investors’ capital contribution within 10% of where it would have been pre-2018 tax reform.  However, for most tax equity investors in today’s ITC market, the required additional commitment or ‘risk’ is not worth the reward if the partner has little tolerance for the DRO or is not interested in building up a net operating loss (NOL) via bonus depreciation.  

    Bonus Deprecation on ‘Second-Use’ – Used Property

    Originally, bonus depreciation was conceived as an economic policy using tax law to increase U.S. job creation and economic growth.  The stated economic purpose of bonus depreciation has historically been to stimulate demand and increase commercial spending on newly manufactured goods.  Yet under the new law, some used property may also be eligible for bonus depreciation6.  

    Because of this change, the law may now spur unique opportunities in renewable energy, perhaps with projects that involve previously used equipment or assets.  It will remain to be seen whether the new law might stimulate the development of a secondary market for used renewable energy assets, (assets that could come to market when either wind, solar or other related assets are replaced with more technologically efficient equipment) or as part of so-called “repowering” activities (where wind or other power generating assets are replaced while using existing used assets as part of the overall project upgrade).

    Regardless, a few words of caution are in order: previously used or previously “placed-in-service” depreciable assets are generally not eligible for the PTC or the ITC.  

    While there is a highly technical (and limited) partial exception to the general rule prohibiting used assets from being part of a facility eligible for PTC or ITC, that rule limits the ratio of used property to no more than 20% and is known as the 80/20 rule.7 This federal tax rule is therefore an exception to the rule that in general, only 100% new, first-use or original-use assets are eligible for either the PTC or ITC.  This also means that structuring a financing for a renewable project deploying some (or all) used equipment with the intention of claiming either the PTC or ITC will involve a tax depreciation and a tax credit planning exercise that will diverge from those most commonly done. Such projects must be approached with both caution and technical tax expertise.

    Other Tax Planning Issues

    Existing Deals  

    One economic reality under the new law that indirectly impacts renewable energy investors and sponsors is the new lower 21% overall corporate income tax rate.  

    For those who had previously recognized tax depreciation deductions that are presently unrealized, whether suspended (or as part of a net operating loss (NOL)), the new lower corporate tax rate has rendered those tax deductions less valuable.  The reduced value is now expected to impact the amount of capital, i.e., cash, that tax equity investors are willing to invest for that portion of the tax benefit realized by the investor that is attributable to tax depreciation. 

    For deals that closed prior to passage of the new tax law, the partnership agreement that investors made with the tax equity partnership may now be viewed by those investors as unattractive. Many deals in 2017 closed with an expanded “Change in Tax Law” section which provided for changes in the partnership accounting to the extent tax reform reduced the value of any of the tax or economic benefits the investor was using to size their investment. 

    For partnerships whose agreement didn’t include such provisions, the investor may want out of the deal.  For others, it may mean a new partnership agreement must be reached.  

    Each partnership agreement will need to be addressed if the partners are not happy with their tax position following passage of the new legislation.

    New Deals

    To take advantage of the new bonus depreciation rules for new deals, one should expect the amount investors are willing to invest to be less than it was in the past under the 35% corporate tax rate, even if that investor has the immediate ability to utilize the full depreciation amount to lower their current year’s tax.

    The indirect impact of lowering the overall corporate rate is likely to result in less cash raised by sponsors of tax equity financed projects, thus leaving a gap in the “capital stack” that will need to be filled with additional sponsor equity, additional debt, increased revenues from higher PPA prices, or some other source of funds that on an after-tax basis fills the gap.

    M & A Transactions 

    While the new law could result in an immediate deduction of a portion of the purchase price in the acquisition year, (or even generate NOLs that have favorable tax planning consequences connected to newly modified NOL rules), in the case of renewable energy M & A, the advent of the new 100% bonus depreciation rules now requires a heightened attention to detail by all parties when renewable energy M & A is concerned.

    In the context of renewable energy project asset acquisitions, (whether actual or those that fall under IRC section 338 deemed asset purchase rules), though the cost of used property may be added to the adjusted basis of the acquired property, and may be fully depreciated if allocable to qualified property eligible for bonus depreciation,  structuring the transaction as an asset purchase in order to increase the tax depreciation deductions will not automatically enable PTC or ITC tax credits to be claimed if attributable to used equipment.  Again, this is because, absent compliance with the 80/20 rule, neither PTCs nor ITC are allowed on used assets.8

    Expansion of Section 179 Expensing

    The TCJA separately increased the maximum amount a taxpayer may expense under section 179 to $1 million, and further increased the ‘investment limit’ to $2.5 million. The $1 million limitation is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $2.5 million. Each amount is indexed for inflation for taxable years beginning after 2018.

    A note of caution: on its face, the new 179 expensing rule appears to be identical to 100% bonus, at least for expenditures under $2.5 million, but it is not. The difference here matters, and it particularly matters for companies involved with section 48 ITC eligible property, such as vendors of solar, small wind, fuel cell, CHP and geothermal heating and cooling, who serve business clients otherwise eligible for section 48 ITC9.  

    While section 179 expensing and 100% bonus appear to be identical, the similarity does not apply to the impact it has on the section 48 ITC.  The rationale behind this is a technical one. Specifically, tax depreciation, including bonus depreciation, does not reduce the eligible depreciable basis to which the section 48 tax credit rate is applied, i.e., 30% in year 2019, 26% in 2020, and 22% in 2021.  However, claiming a section 179 deduction does reduce ones’ federal income tax depreciable basis, and that stand-alone reduction to the tax depreciable basis imposed by section 179 does reduce the eligible depreciable basis to which the section 48 ITC rate is applied. 

    Claiming section 179 expensing on section 48 ITC eligible property will reduce the amount of section 48 tax credits the owner of the asset can claim.  Taxpayers should be aware that simply attempting to accelerate one’s tax deduction using section 179 can, in the case of the ITC, cause the loss of a far more economically valuable tax credit. Thus, business clients of those providing ITC eligible products should not be misled into believing that they can claim both 179 and the ITC at the otherwise allowable maximum ITC amount.

    State decoupling

    One final, but by no means less impactful set of considerations is how state law may operate in cases where federal bonus depreciation is claimed.  We are already seeing states moving to “decouple” the federal income tax law changes for 100 percent bonus depreciation. This is occurring in conjunction with state income tax law and in other areas of State and Local Tax (SALT) rules such as property and sales taxes.  Check with your state and local tax adviser on how the federal income tax rules interact with state tax rules.


    The Tax Cuts and Jobs Act (TCJA) has dramatically changed the depreciation and expensing rules for trade or business assets.  These changes may have a significant impact on the renewable energy sector. Many of the changes are positive. Others warrant caution.

    Thought the impact of these changes do involve a fair bit of tax complexity, for some investors, particularly those making PTC motivated investments, federal bonus depreciation can be attractive if investors are willing to meet the more complex federal income tax accounting rules that are required to benefit from it.  Regardless, the general outlook for renewable energy under the new U.S. tax law remains favorable.


    1Reminder, only property used in a “trade or business” is depreciable.  Individuals and homeowners claiming the IRC section 25D energy credits (rather than the IRC section 48 energy tax credit) are NOT eligible to depreciate assets’ eligible for the 25D credit to the extent they claim the 25D credit.

    2The new law passed by Congress does an inadequate job of defining “acquisition date.” Though tax practitioners do expect U.S. Treasury and IRS guidance on this issue, you should consult with your tax professional to ensure that your assumption about the acquisition date of an asset is correct under the law.

    3It is presently our understanding that the rules for binding written contracts remain substantially the same as under prior law, subject to any revisions the tax authorities may make in newly issued guidance.

    4For property under IRC section 45 or 48 that is neither wind nor solar, other rules and depreciable useful lives may apply. See IRS Pub. 946 for details.

    5Investor Owned Utility (IOU).

    6While used property may generally be depreciated when placed in service, this general rule was not originally applied to pre-2017 Act bonus depreciation.

    7See Rev. Rul. 94-31, 1994-1 C.B. 16; Notice 2008-60, 2008-2 C.B. 178.

    8Supra, note 5.

    9For those with customers or taxpayers looking to claim the IRC section 25D credit, 179 is generally not an issue because of the prohibition of business use of 25D eligible property.

    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.


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    brett weal

    Brett Weal

    Principal, Project Finance & Consulting

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