The Internal Revenue Service (IRS) has issued a set of rules concerning the 100% depreciation bonus Congress passed at the end of 2010. The 100% bonus permits the owner of certain property, including wind turbines and certain transmission assets, to write off the entire cost of the property in the year it goes in service.
The 100% bonus is an expansion of an existing 50% bonus. The 50% bonus now applies to property placed in service after 2007 and before 2013. A 50% bonus permits half of the project cost to be written off immediately. The other half is depreciated normally.
The new rules relieve some uncertainty and have increased optimism that project owners will be able to extract some value from these incentives. The 100% bonus can be worth as much as $0.0445 per dollar of capital cost for wind turbines and $0.18 per dollar of capital cost for certain transmission assets.
The 100% bonus applies to property acquired and placed in service between Sept. 8, 2010, and Jan. 1, 2012. Certain long-lived properties have until Jan. 1, 2013. A property is considered acquired when the owner pays or accrues the cost of the property, depending on its accounting method.
Any taxpayer that enters into a written binding contract during this eligibility window for the acquisition or construction of the property meets the acquisition requirement set forth by the IRS.
If an owner self-constructs the property, then the project will meet the acquisition requirement if the owner starts real physical work on the property during the eligibility window. Property is self-constructed when it is constructed for the owner by a third party under a binding written contract.
The IRS provided a safe harbor that says physical work will be presumed not to occur until more than 10% of the total cost of the bonus-eligible property is accrued. This gives some leeway to projects that started preliminary work prior to the eligibility window.
If a taxpayer starts self constructing a unit of property too early, the 100% bonus may still be available for components in that unit that do qualify. This differs from the general rules that apply to the 50% bonus. Those rules say that if a larger unit does not qualify, then its components do not either.
If a project as a whole qualifies for the bonus, but the taxpayer purchases a component too early or too late, then the component is ineligible, but the ineligibility of the component does not affect the eligibility of the rest of the equipment.
A taxpayer must also place the property into service during the eligibility window. In addition, the original owner/user generally is the only one eligible for the bonus. A disposition of the property during the first year will cause that property owner to lose the bonus. However, there are two exceptions.
The first is that if the equipment is placed in service during the eligibility window, the taxpayer may sell and leaseback the equipment within three months of the in-service date. The lessor may then claim the bonus.
The second is that the lessor in a sale-leaseback may syndicate its leasehold interest within three months from the date of the sale-leaseback. The participants in the syndication may claim their share of the bonus.
Project owners who claim a 30% cash grant from the U.S. Department of the Treasury are required to reduce their depreciable basis in the related property by 50% of the grant or credit. The new rules clarify that the basis reduction occurs prior to claiming the 100% bonus.
In certain situations, the owner of the grant-eligible property may lease the property to a third party and elect to pass the incentive to the lessee. In those cases, the lessee is required to report 50% of the amount of the cash grant as income straight-line over the shortest recovery period available for that property.
The new rules make clear that the recovery period under general rules is not altered by the fact that the 100% depreciation bonus permits a complete write-off in one year.
For example, the income related to wind or solar equipment would be taken into account over five years, even where the 100% bonus is claimed. Generally, the bonus must be claimed unless the taxpayer makes a timely election out of it.
The IRS notice provides some relief. It says that if the taxpayer timely filed a return for 2009 or 2010, but did not deduct the 50% bonus or elect out of it, then the taxpayer will be treated as opting out.
In addition, a taxpayer may opt out of the 100% bonus and instead claim the 50% bonus for property placed in service in the tax year that includes Sept. 9, 2010. However, if equipment qualifies for the 100% bonus in 2011 or 2012, then the taxpayer may claim only the 100% bonus or nothing.
John Marciano is an associate at the Washington, D.C., office of Chadbourne & Parke. He can be reached at (202) 974-5678 or firstname.lastname@example.org.