Business activity is strongly affected by government policy as (well as clarity and certainty with which those policies are implemented). Value depreciation of (qualified) assets is a government measure instituted in the tax law to promote investment. Depreciation of assets for the purpose of tax returns has been in vogue in the States for a long time. Various amendments and improvements have been made over the years. The current form is the Modified Accelerated Cost Recovery System (MACRS) established in 1986, and updated from time to time. Under this system, the capitalized cost of tangible property can be recovered over a specified life-time through annual tax deductions for value depreciation.
The lives of various classes are specified broadly by the Internal Revenue Service (IRS) in their Internal Revenue Code (IRC). They (IRS) publish tables of lives by classes of assets. The tables can be used to compute the depreciation for a given type of qualified asset. For example, television and broadcasting equipment have a specified life time of five years, and office furniture and equipment qualify for a cost recovery tax deduction over a period of seven years.
Methods of Depreciation under MACRS
The depreciation deduction can be computed under one of two possible methods, namely, straight-line, or declining-balance-switching-to-straight-line (at an optimum point in life) to optimize depreciation deduction. The taxpayer has the option to select one of the two methods. Details are available in IRS Publication 946 (a rather lengthy document).
In the aftermath of economic crisis of 2008, US Congress allowed 100% bonus depreciation in 2010 valid for equipment brought in use by end 2011. The incentive, after repeated modifications, now stands at 50% in 2017 (gradually to be phased out to 40% in 2018, 30% in 2019, and 0% later).
When to Begin Depreciating and When to Stop
Depreciation under MACRS is allowed from the time you start business use of the asset, and until the time when you have either recovered the full basis, or the equipment is retired, whichever happens earlier. In the words of publication IR 946, “You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first”.
Applicability to Solar and Other Renewable Energy Equipment
In line with the Government policy to promote clean and renewable energy in the United states, Solar Energy Equipment is included in the approved classes for depreciation. The life time specified for (qualified) solar equipment is five years. This five-year recovery period is also applicable to other renewable energy technologies including wind energy, combined heat and power technology, geothermal, fuel cells, etc. Some categories of biomass property and natural gas gathering lines have a seven-year cost recovery period. This contrasts with the larger 15-year depreciation period for nuclear power plants.
Equipment qualifying for an Investment Tax Credit (ITC) of 30% or a 1603 Treasury grant, the cost basis can be reduced by 15% (half of 30%).