Legislative Update - Effects of cost recovery proposals in Senate Finance discussion draft on renewable energy industry 

November 22:  Senate Finance Chairman Max Baucus on November 21, 2013, released, as part of a package of tax reform, a staff “discussion draft” of proposals dealing with depreciation and other cost recovery provisions, as well as several tax accounting method issues.

This report briefly examines possible effects of these proposals on the renewable energy industry.

Asset pools

Under current law, most renewable energy assets are depreciated using 5-year MACRS, using the double declining balance recovery method, which provides for the greatest depreciation allowance in the first full year of use and declines over time.

The proposal in the Finance Committee staff discussion draft would repeal the current MACRS rules and replace them with a system using four “pools.”

Assets in specific IRS asset classes would be assigned to one of the four pools, arranged by the length of the average economic depreciation rate for those classes. A specific percentage of the year-end balance of each pool would be allowed as a depreciation deduction for that tax year:

  • Pool 1 - 38%
  • Pool 2 - 18%
  • Pool 3 - 12%
  • Pool 4 - 5%

The pool balance would be increased by additions and improvements to pool property during the year, and reduced by the gross proceeds of any dispositions of pool property during the year. It would also be reduced by depreciation deductions. The depreciation would continue indefinitely, unless the pool balance is less than $1,000.

Under the pooled system, renewable energy assets would be assigned to Pool 4, using the 5% pool balance depreciation deduction. This would result in a significantly longer cost recovery period for these assets than under current law, and a slower recovery rate.

Note that the proposal also would do away with the first year “bonus depreciation” deduction that has been allowed since 2008 for new assets, so the effective recovery rate would be even further decelerated.

In addition, taxpayers would have to apply the new pooled system to energy property on which depreciation had already begun under the current rules. The basis of any pool property at the beginning of the 2015 tax year would be included in the pool.

Comparison of current depreciation with proposal

The table below sets out a simple comparison (by percentage of original basis) of the timing difference in depreciation deductions between 5-year MACRS and Pool 4.

The table goes out to Tax Year 9, but note that Pool 4 depreciation would go on for a much longer period and could continue indefinitely, as stated above. It would take 14 tax years to recover 50% of the basis of an asset in Pool 4.


Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

5-year MARCS










Pool 4











KPMG observation

Note that 5-year MACRS plays a key role in the development of renewable energy projects. Renewable energy project developers are able to attract tax equity investors with an after-tax rate of return based on the combined tax benefit of the available renewable energy tax credits and MACRS depreciation.

The elimination of MACRS in favor of the proposed pooled system would lower potential investors’ return, and hamper the development of renewable energy projects.

The Finance Committee staff is aware of the potential impact the proposed cost recovery system could have on the renewable energy industry. In a Finance summary of the proposal, it is stated that the staff is examining the issue and is considering “improving and making permanent” certain energy tax credits.

Comments are requested by January 17, 2014, on whether and how tax incentives for renewable energy should be adjusted in light of the proposal.

For more information, contact a tax professional with KPMG’s Washington National Tax:

John Gimigliano

(202) 533-4022

David Culp

(202) 533-4104

Hannah Hawkins

(202) 533-4225

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