REAP + ITC + Depreciation (Section 179 / Bonus) — How the “stack” works
Eligible farms and rural small businesses can often combine three benefits on a solar project:
1
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REAP grant (often up to ~25%)
REAP is typically a reimbursement-style grant that puts cash back into the project. USDA also notes REAP grants are generally taxable income, and recipients typically receive a Form 1099-G. REAP grant (often up to ~25%)
2
Federal Investment Tax Credit (ITC) (often 30% and can be higher with “adders”)
The ITC is a dollar-for-dollar federal tax credit based on eligible project cost. Depending on eligibility, projects may qualify for bonus amounts (“adders”) that increase the credit percentage.
Depreciation (bonus + MACRS; sometimes §179)
Solar is generally eligible for accelerated depreciation. Under current law (the One Big Beautiful Bill Act), qualifying property acquired and placed in service after January 19, 2025, is eligible for 100% bonus depreciation, allowing businesses to deduct the full depreciable basis in year one. Note: Taxpayers may elect out of 100% bonus depreciation and instead use traditional MACRS or elect a lower bonus percentage if that better fits their tax situation.
The key interaction (simple rule)
If you claim the ITC, you generally must reduce the depreciable basis by 50% of the ITC. (You still get the full credit — you just can't depreciate that same portion.)
Sample illustration — $150,000 project (example only)
Assumptions: $150,000 eligible cost, REAP at 25%, and two ITC scenarios (30% and 40%). Depreciation shown assumes 100% bonus depreciation election. Tax savings assume a combined federal/state tax rate of 30% for illustrative purposes only — your actual rate may differ significantly.
Scenario A: 25% REAP + 30% ITC
Direct Benefits:
• REAP grant (cash back): 25% × 150,000 = $37,500
• ITC (tax credit): 30% × 150,000 = $45,000
Depreciation Benefits:
• Depreciable basis reduction: 50% × 45,000 = $22,500
• Depreciable basis: 150,000 − 22,500 = $127,500
• Year 1 bonus depreciation deduction (if 100% elected): $127,500
• Tax savings from depreciation (at 30% tax rate): 127,500 × 0.30 = $38,250
Effective Out-of-Pocket Summary:
• Original project cost: $150,000
• Less: REAP grant: -$37,500
• Less: ITC: -$45,000
• Less: Depreciation tax savings: -$38,250
• Plus: Tax on REAP grant (at 30% rate): +$11,250
• NET OUT-OF-POCKET: $40,500 (27% of original cost)
Scenario B: 25% REAP + 40% ITC (example "with adders")
Direct Benefits:
• REAP grant (cash back): $37,500
• ITC (tax credit): 40% × 150,000 = $60,000
Depreciation Benefits:
• Depreciable basis reduction: 50% × 60,000 = $30,000
• Depreciable basis: 150,000 − 30,000 = $120,000
• Year 1 bonus depreciation deduction (if 100% elected): $120,000
• Tax savings from depreciation (at 30% tax rate): 120,000 × 0.30 = $36,000
Effective Out-of-Pocket Summary:
• Original project cost: $150,000
• Less: REAP grant: -$37,500
• Less: ITC: -$60,000
• Less: Depreciation tax savings: -$36,000
• Plus: Tax on REAP grant (at 30% rate): +$11,250
• NET OUT-OF-POCKET: $27,750 (18.5% of original cost)
Understanding Your Net Cost
The "out-of-pocket" calculations above illustrate how these incentives can dramatically reduce the true cost of a solar investment. However, several important factors affect your actual results:
• Your tax rate matters: The examples assume a 30% combined federal/state tax rate. Higher tax rates increase the value of depreciation deductions; lower rates decrease it.
• Taxable income requirements: You need sufficient taxable income to utilize the ITC and depreciation deductions. Unused credits can be carried forward, but this delays the benefit.
• Cash flow timing: REAP grants are reimbursements (paid after installation), while ITC and depreciation are claimed when filing taxes. Your upfront cash requirement will be higher than the net out-of-pocket cost.
• REAP grant taxability: The grant increases your taxable income, which partially offsets its benefit. The net value depends on your marginal tax rate.
Disclaimer
We work hard to provide accurate, real-world examples and planning numbers. However, every tax situation is different (entity type, income levels, placed-in-service date, eligibility for adders, depreciation elections, available taxable income, and actual tax rates). The 30% tax rate used in out-of-pocket calculations is for illustration only—your effective rate may be significantly higher or lower. The 100% bonus depreciation mentioned above is available for qualifying property under current law, but taxpayers can elect out if alternative depreciation methods are more beneficial.
These calculations represent potential first-year tax benefits only. Actual cash flow, financing costs, and timing of benefits will vary. Please consult your accountant or tax professional to confirm your exact credit percentage, depreciation treatment, optimal depreciation election, applicable tax rates, and final net cost based on your specific situation.