A new provision in the Small Business Jobs Act passed by the Senate last week may mean big things for wind farm owners who place projects into service this year. The $42 billion bill is expected to create 500,000 jobs, according to a summary of the bill.
The bill would also provide a slew of tax breaks to encourage investment. One such provision is bonus depreciation, which allows wind farm owners to write off more than 50% of the capital costs of building a wind farm in the year the project is commissioned. To take advantage of this tax break, project owners must commission the project before by the end of this year.
Typically, most assets owned by businesses are written off over a period of time prescribed by tax rules. Under existing rules, wind farms are written off over five years. The new bonus depreciation law would make wind farm writeoffs even quicker.
The faster owners can write off capital costs, the more valuable the asset becomes, explains Eli Katz, a partner at New York-based law firm Chadbourne & Parke.
“Congress has reached back into the tax-incentive bag and doled out a tax benefit that has been in and out of the tax code for the last decade,” he says. “Faster tax depreciation makes tax-equity investments more valuable and is good for wind farm developers with large tax balance sheets that can use the tax benefits themselves. It also has implications for tax-equity investments that were closed earlier this year. Some project owners may choose to commission their projects this year in order to take advantage of this new rule.”
President Obama is also pushing a larger bonus depreciation measure for 2011. Obama’s proposal – which applies to almost all types of capital assets – would let owners take a 100% write off for any project built in 2011.
“If this goes through, it would be the biggest form of bonus depreciation ever enacted,” Katz says. “If you believe that tax incentives are the way to turbo-charge this business, then this is certainly one way to do it.”
However, Katz says, bonus depreciation, may not be a panacea for the renewable energy financing backlog in the U.S.
“Most projects will still need to attract a tax-equity investor, and there is growing evidence that many large financial institutions have little tax appetite, and so, bonus depreciation may not be enough to get them off the sidelines, especially in a low-interest-rate environment where deferring taxes is less valuable,” he says.