Basis Reduction & Bonus Depreciation: A $75 Million Credit Leaves $212.5 Million to Deduct
Canyon Storage LLC places a standalone battery project in service in 2026.
Assume:
Qualified investment $250.0m
Illustrative §48E credit rate 30.0%
-------
Clean electricity investment credit $75.0m
A model that puts $75 million of credit in the tax tab and then depreciates the original $250 million has already counted too much value.
Section 50(c) cuts the tax basis first.
For a clean electricity investment credit, only 50% of the credit is taken into account in the basis reduction:
§48E credit $75.0m
50% basis adjustment $37.5m
-------
Post-credit depreciable basis $212.5m
That $212.5 million — not $250 million — is the starting point for Canyon's depreciation model.
Then §168 asks a second question: how quickly can Canyon deduct it?
For a 2026 storage project, the answer can be all at once.
The credit haircut happens before depreciation
The familiar “85% basis” shortcut comes from one specific fact pattern:
30% investment credit
×
50% §50(c) basis reduction
=
15% of original basis removed
100% - 15% = 85%
For Canyon:
$250.0m × 85% = $212.5m
But 85% is not a universal clean-energy basis percentage.
If the investment-credit rate changes, the haircut changes.
For example:
| Illustrative investment-credit rate | §50(c) basis reduction | Remaining basis as % of original |
|---|---|---|
| 6% | 3% | 97% |
| 30% | 15% | 85% |
| 40% | 20% | 80% |
| 50% | 25% | 75% |
The model should therefore calculate:
Post_Credit_Basis
=
Qualified_Basis
-
50% × Investment_Credit
not hard-code 85%.
This distinction also matters for transferred credits and direct pay. Moving or refunding the credit changes monetization. It does not erase the underlying §50(c) adjustment.
If Canyon transfers the $75 million credit under §6418, Canyon still carries the reduced property basis.
If an applicable entity instead monetizes an otherwise comparable credit under §6417, the investment-credit basis rule still belongs in the underlying credit calculation.
Canyon's storage property is five-year property
Canyon is a storage example deliberately.
For property placed in service after December 31, 2024, §168(e)(3)(B)(viii) includes energy storage technology described in §48E(c)(2) as five-year property.
Without bonus depreciation, the standard half-year MACRS pattern for five-year property is:
| Tax year | Regular MACRS percentage |
|---|---|
| 1 | 20.00% |
| 2 | 32.00% |
| 3 | 19.20% |
| 4 | 11.52% |
| 5 | 11.52% |
| 6 | 5.76% |
Applied to Canyon's $212.5 million post-credit basis:
Year 1 $42.500m
Year 2 $68.000m
Year 3 $40.800m
Year 4 $24.480m
Year 5 $24.480m
Year 6 $12.240m
---------
Total $212.500m
That table assumes the half-year convention. If the mid-quarter convention applies, the regular MACRS percentages change. That matters for Canyon's old-acquisition pool or for a class where bonus depreciation is elected out; property fully deducted through 100% bonus does not leave regular depreciable basis for the convention to spread.
There is also a current-law classification trap. The 2025 law removed the old §168(e)(3)(B)(vi) solar/wind energy-property route to five-year treatment for solar or wind property beginning construction after 2024. Separately, §168(e)(3)(B)(viii) treats §48E qualified facilities / qualified property and energy storage technology placed in service after 2024 as five-year property. Canyon is relying on the storage rule in clause (viii), not on a legacy §48 solar rule.
That is the fallback schedule.
For most newly acquired qualifying Canyon property, it is no longer the base case.
100% bonus depreciation is back — permanently
The 2025 tax law changed §168(k) from a phase-down into a permanent 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025.
Notice 2026-11 is the current IRS interim guidance for applying the new rule.
Canyon's five-year storage property fits the recovery-period side of the qualified-property test.
Assume, for the moment, that all Canyon property satisfies the post-January-19 acquisition requirement and the other §168(k) conditions.
Then:
Post-credit depreciable basis $212.5m
Bonus depreciation percentage 100%
-------
2026 depreciation deduction $212.5m
Remaining tax basis after depreciation $0.0m
At an illustrative 21% corporate tax rate, assuming the taxpayer can use the full deduction:
$212.5m × 21% = $44.625m cash-tax shield
If Canyon values a year-end 2026 tax shield at an 8% discount rate:
PV = $44.625m / 1.08
= $41.319m
The tax benefit is large.
The words “assuming the taxpayer can use the full deduction” are doing real work.
We will come back to them.
Beginning of construction is not the bonus-depreciation acquisition test
This is where tax-credit teams can import the wrong date into the depreciation model.
The project's beginning-of-construction date for §48E is not automatically the acquisition date for §168(k).
They are different legal tests.
Notice 2026-11 tells taxpayers to apply the acquisition-date rules in the existing bonus-depreciation regulations using January 19 / January 20, 2025 as the new dividing line.
For property acquired under a written binding contract, the acquisition date is not always simply the signature date.
The relevant date is generally the later of:
- the date the contract is entered into;
- the date it becomes enforceable under State law;
- the date cancellation periods end; and
- the date relevant contingencies are satisfied.
The definition of a written binding contract also matters. A contract that limits damages to a specified amount can fail the bonus-depreciation definition of binding contract.
Self-constructed property has another set of rules, including rules for when manufacture, construction or production begins and a component election.
So this model is wrong:
Tax-credit BOC = December 2024
→ acquisition date = December 2024
→ no 100% bonus
And this model is also wrong:
Equipment contract signed February 2025
→ acquisition date = February 2025
→ 100% bonus
without reviewing enforceability, cancellation rights, contingencies and the self-constructed-property rules.
Canyon needs a depreciation acquisition schedule, not a copied BOC cell.
One Canyon project can contain two bonus-depreciation populations
Now add the procurement layer.
Canyon has $250 million of qualified investment, but a tax review finds that the equipment does not all have the same §168(k) acquisition date.
Assume:
Pool A — post-Jan. 19, 2025 acquisition $160.0m
Pool B — pre-Jan. 20, 2025 acquisition $90.0m
-------
Total qualified investment $250.0m
For Pool B, assume a written binding contract satisfying the bonus-depreciation rules became effective on December 15, 2024.
Both pools are placed in service in 2026.
Allocate Canyon's $37.5 million §50(c) basis reduction proportionately:
Pool A share of project basis 64%
Pool A share of basis reduction
= $37.5m × 64%
= $24.0m
Pool A post-credit basis
= $160.0m - $24.0m
= $136.0m
Pool B share of project basis 36%
Pool B share of basis reduction
= $37.5m × 36%
= $13.5m
Pool B post-credit basis
= $90.0m - $13.5m
= $76.5m
Pool A gets the new 100% bonus treatment under our assumptions.
Pool B remains under the prior-law phase-down. For qualified property placed in service in 2026 under that prior regime, the bonus percentage is 20%.
Pool A
$136.0m × 100% = $136.0m year-one deduction
Pool B
First take 20% bonus:
$76.5m × 20% = $15.3m bonus deduction
Then regular MACRS applies to the remaining:
$76.5m - $15.3m = $61.2m residual basis
Using the half-year convention:
2026 regular MACRS
= $61.2m × 20%
= $12.24m
So Pool B's total 2026 depreciation is:
$15.30m bonus
+ 12.24m regular MACRS
= $27.54m
Canyon's total year-one deduction is now:
Pool A $136.00m
Pool B $27.54m
--------
2026 depreciation $163.54m
Compare that with the all-post-January-19 case:
All qualifying for 100% bonus $212.50m
Mixed acquisition dates $163.54m
--------
Deduction deferred $48.96m
Nothing about Canyon's engineering changed.
A procurement-date classification moved $48.96 million of depreciation out of year one.
The present-value consequence is smaller than the year-one headline
The deferred $48.96 million is not lost.
Pool B continues through regular five-year MACRS.
Its complete schedule is:
| Tax year | Pool A depreciation | Pool B depreciation | Canyon total |
|---|---|---|---|
| 2026 | $136.000m | $27.540m | $163.540m |
| 2027 | — | $19.584m | $19.584m |
| 2028 | — | $11.750m | $11.750m |
| 2029 | — | $7.050m | $7.050m |
| 2030 | — | $7.050m | $7.050m |
| 2031 | — | $3.525m | $3.525m |
| Total | $136.000m | $76.500m | $212.500m |
Assume again:
Corporate tax rate 21%
Discount rate 8%
Tax shield received at year end
All deductions usable
The present value of the all-100%-bonus case is approximately:
$41.319m
The mixed-acquisition case is approximately:
$39.847m
Difference:
$1.473m
The acquisition-date issue delayed almost $49 million of deduction but cost about $1.5 million of present value under these assumptions.
That is the financing number.
If all $250 million of Canyon's qualified investment fell into the old acquisition population, the same assumptions would produce roughly a $4.1 million PV disadvantage versus 100% bonus.
Do not put “lost depreciation = $48.96m” in an IC memo.
The depreciation moved.
The present value is what changed.
The 40% transitional election is not a recurring 2026 option
The old draft of this analysis made a tempting mistake.
Section 168(k)(10) allows a taxpayer to elect 40% bonus depreciation instead of 100% for qualifying property during the first taxable year ending after January 19, 2025.
For a calendar-year taxpayer, that is generally 2025.
It is not a standing election that Canyon can simply choose in 2026 because 40% happens to fit the tax-equity model better.
For property placed in service in a later year, the normal §168(k)(7) election out is different.
That election can turn off bonus depreciation for an entire class of qualified property placed in service during the taxable year.
For Canyon's five-year property, the simplified choice in 2026 is therefore closer to:
100% bonus depreciation
or
elect out for the five-year class
→ regular MACRS
not:
100%
or
40%
whichever makes the model prettier
That distinction matters once a partnership investor enters the example.
100% bonus can outrun a tax-equity investor's outside basis
Now assume Canyon Storage is owned through a partnership.
BankCo is the tax-equity investor.
For teaching purposes, assume the partnership agreement allocates 99% of the relevant depreciation to BankCo.
Also assume that, after BankCo's contribution, §752 liability allocations, the §50(c)(5) partnership-interest basis adjustment and other relevant basis movements, BankCo has $100 million of outside basis immediately before the current-year depreciation allocation.
If all Canyon property qualifies for 100% bonus:
Canyon depreciation $212.500m
BankCo allocation 99.0%
--------
BankCo allocated deduction $210.375m
But §704(d) does not allow BankCo to deduct partnership losses beyond its outside basis.
On the deliberately simplified facts:
BankCo outside basis before loss $100.000m
Allocated depreciation loss $210.375m
---------
Currently deductible under §704(d) $100.000m
Suspended under §704(d) $110.375m
Closing outside basis after deduction $0
The project generated $210.375 million of allocated depreciation for BankCo.
Only $100 million was currently usable under the assumed §704(d) fact pattern.
The other $110.375 million is not worthless, but it needs later outside basis to become deductible.
This is exactly why “100% bonus” is not the same thing as “100% year-one tax value.”
Outside Basis and Suspended Losses follows that ledger in detail.
And keep the ledgers separate: §704(b) book capital and any DRO analysis determine whether the allocation can be respected economically; §704(d) outside basis determines the deduction limit. A DRO is not additional outside basis.
Other investor-specific limitations may apply depending on the investor. Do not automatically paste §465, §469 and §461(l) into every institutional tax-equity model.
Electing out can improve usability while destroying present value
Suppose Canyon could validly make a §168(k)(7) election out for its five-year class.
The regular MACRS year-one depreciation on $212.5 million is:
$212.5m × 20%
= $42.5m
BankCo's illustrative 99% allocation becomes:
$42.5m × 99%
= $42.075m
That fits inside the assumed $100 million outside basis in year one.
But it does not prove the election out is better.
If all deductions were immediately usable, the present value of the 100% bonus tax shield at a 21% rate and 8% discount rate is about:
$41.319m
The present value of regular five-year MACRS under the same assumptions is about:
$36.205m
Giving up bonus therefore costs roughly:
$5.114m of PV
before considering basis constraints.
The decision is not “fast depreciation good / slow depreciation bad.”
It is:
PV of deduction actually usable under 100% bonus
versus
PV of deduction actually usable after election out
If BankCo can restore basis quickly, 100% bonus may still win decisively.
If a large part of the accelerated deduction remains suspended for years, the answer can move.
The spreadsheet has to model the investor's usable deduction, not merely the partnership's depreciation expense.
Transferability does not rescue the property basis
Now remove BankCo and let Canyon transfer the $75 million credit under §6418.
The credit buyer gets the transferred credit.
Canyon still starts depreciation from $212.5 million.
Qualified investment $250.0m
§48E credit $75.0m
§50(c) basis reduction $37.5m
-------
Canyon depreciable basis $212.5m
If Canyon is itself a partnership, the §6418 transfer consideration can create tax-exempt income that increases partner outside basis.
That can affect the partners' §704(d) capacity.
It does not put the $37.5 million back into the property's tax basis.
Those are two different basis movements:
§50(c)
→ property basis goes down
§6418 partnership tax-exempt income
→ partner outside basis can go up
One transaction can move those ledgers in opposite directions.
Transferability Under §6418 works through that interaction numerically.
Credit recapture restores only half the §48E recapture amount to basis
Return to Canyon's $75 million credit.
Assume a standard §50 event later produces a $45 million recapture amount.
Section 50(c)(3) applies the same 50% rule in reverse for an energy credit or clean electricity investment credit.
Recapture amount $45.0m
Basis restoration percentage 50%
-------
Basis increase $22.5m
The basis restoration is not $45 million.
And the economic result depends on the event.
If Canyon is being sold, the basis increase occurs immediately before the event and changes the gain calculation.
If Canyon retains property after a different cessation event, the restored basis can affect subsequent depreciation.
Do not simply subtract a “depreciation benefit” equal to $22.5 million from the $45 million recapture tax.
One is tax basis.
The other is tax.
ITC Recapture After 2025 keeps those two amounts separate.
A fully depreciated Canyon can still have a large ordinary-income exit
Section 50(c)(4) treats the basis reduction as depreciation for §§1245 and 1250 recapture purposes.
Assume Canyon took 100% bonus depreciation on the full $212.5 million post-credit basis and later sells the storage equipment for $220 million.
Ignore transaction costs and other basis adjustments solely to isolate the mechanism.
Immediately before sale:
Post-credit basis before depreciation $212.5m
100% bonus depreciation ($212.5m)
-------
Adjusted basis $0.0m
Canyon also had a $37.5 million §50(c) basis reduction that §50(c)(4) treats as depreciation for recapture purposes.
For §1245 property, the combination can make essentially the entire gain ordinary up to the statutory recapture amount.
On the simplified numbers:
Sale price $220.0m
Adjusted basis $0.0m
-------
Gain $220.0m
The year-one deduction was real.
So is the ordinary-income consequence when the asset is sold.
A model that captures the $44.625 million year-one tax shield and leaves the exit tax at a generic capital-gain rate is internally inconsistent.
Canyon's depreciation page
A clean project model should make these calculations visible.
Credit and basis
Qualified investment $250.0m
§48E rate 30.0%
Credit $75.0m
§50(c) haircut $37.5m
Post-credit basis $212.5m
Property classification
Asset type energy storage technology
Recovery period 5-year property
Placed in service 2026
Bonus-eligible recovery period? YES
Acquisition buckets
Pool A — post-Jan. 19, 2025 $160.0m
Pool B — pre-Jan. 20, 2025 $90.0m
Acquisition conclusion supported by:
contract / enforceability / cancellations /
contingencies / self-construction analysis
Depreciation result
Pool A post-credit basis $136.0m
Pool A bonus 100%
Pool B post-credit basis $76.5m
Pool B old-law bonus 20%
2026 project depreciation $163.54m
Tax-equity overlay, if applicable
Investor depreciation allocation [input]
Investor outside basis before deduction [calc]
§704(d) currently usable loss [calc]
Suspended §704(d) loss [calc]
§704(b) / DRO support [separate]
Decision outputs
PV tax shield — 100% bonus [calc]
PV tax shield — mixed acquisition dates [calc]
PV tax shield — election out [calc]
PV of actually usable investor deductions [calc]
The model should be able to answer four different questions without changing worksheets:
- How much credit did Canyon earn?
- How much tax basis survived the credit?
- How fast can Canyon depreciate that basis?
- Who can actually use the resulting deduction?
Those are related calculations.
They are not the same calculation.
What the diligence team should request
For Canyon, the tax-basis workstream should be able to rebuild the model from documents.
- Reconcile qualified investment to the fixed-asset and tax-basis schedules.
- Recalculate the §50(c) reduction from the actual credit rate rather than assuming 85%.
- Identify the §168 recovery period for each material property class.
- Separate §48E storage / qualified-property classification from legacy §48 solar or wind assumptions.
- Build a §168(k) acquisition-date schedule by property or meaningful pool.
- Review written binding contracts for enforceability, cancellation rights, contingencies and damage limitations.
- Identify self-constructed property and any component-election analysis under Notice 2026-11.
- Confirm whether any property remains subject to the pre-2025 bonus phase-down.
- Confirm whether the taxpayer made a §168(k)(7) election out for a class of property.
- Do not use the §168(k)(10) 40% transitional election as a generic 2026 modeling toggle.
- In a partnership, reconcile inside property basis with the §50(c)(5) partner-interest basis adjustments.
- Run the actual investor's §704(d) position before valuing accelerated depreciation.
- On exit, model §1245 / §1250 treatment together with the reduced and depreciated tax basis.
Canyon began with a $250 million project.
The credit reduced that to $212.5 million of depreciable basis.
Acquisition dates decided whether that basis disappeared in year one or over several years.
Partnership basis decided how much of the deduction BankCo could use.
And the same acceleration that created the early tax shield can create ordinary income when the asset exits.
That is why depreciation is not a schedule you fill in after the financing structure is finished.
It is part of the financing structure.
Primary sources: 26 U.S.C. §50 — Basis Adjustment and Recapture · 26 U.S.C. §168 — Accelerated Cost Recovery and Bonus Depreciation · IRS Notice 2026-11 — Permanent 100% Bonus Depreciation Guidance · IRS Publication 946 — How To Depreciate Property · IRS — Instructions for Form 3468