Proposed legislation would provide valuable nuclear energy tax incentives and enhance currently available incentives.
On May 12, 2010, Senators John Kerry (D-MA) and Joe Lieberman (I-CT) released their proposed comprehensive energy and climate change bill. For more information about the proposed legislation, see McDermott’s On the Subject “Kerry and Lieberman Introduce Much-Anticipated Climate Change Bill.” The American Power Act (APA) includes significant incentives for the nuclear industry, including several tax provisions intended to encourage the building of new nuclear power plants. The APA would expand the federal loan guarantee program for nuclear energy development, propose improvements to capitalize on the efficiencies of the new reactor licensing process and support spent fuel recycling research.
The following is a summary of significant tax provisions in the APA, which would become effective upon the date of its enactment.
Five-Year Accelerated Depreciation Period for Tangible Property Used at Advanced Nuclear Power Facilities
The APA would reduce the accelerated depreciation period for tangible property (not including a building or its structural components) which is used as an integral part of an advanced nuclear power facility from fifteen years to five years. An “advanced nuclear power facility” is defined as one whose reactor design was approved by the Nuclear Regulatory Commission after 1993. Because no existing power plants have reactor designs approved after 1993, this provision of the APA would not apply to additions to existing plants.
Investment Tax Credit for Nuclear Power Facilities
The APA adds new Internal Revenue Code (Code) section 48E to provide a 10 percent credit for certain expenditures for nuclear power facility construction. The credit amount is 10 percent of the qualified nuclear power facility expenditures (QNPFE) of a “qualified nuclear power facility.
A qualified nuclear power facility is an advanced nuclear power facility that is placed in service before January 1, 2025, and will use nuclear power to produce electricity. A QNPFE is any amount that is paid, accrued or properly capitalized with respect to a qualified nuclear power facility, for which depreciation is allowable under section 168 of the Code once the facility is placed in service, and which is incurred before the facility is placed in service.
Taxpayers may elect to take into account certain “progress expenditures” for purposes of the credit. When a taxpayer may take into account QNPFEs as “progress expenditures” depends on whether the qualified nuclear power facility is self-constructed. For a self-constructed facility, such QNPFEs are taken into account no earlier than the taxable year for which such expenditures are properly capitalized with respect to the facility. For a facility that is not self-constructed, the expenditures are taken into account in the taxable year they are paid.
A facility is considered “self-constructed” if, at the close of the first taxable year in which a taxpayer has elected to treat QNPFEs as progress expenditures, it is reasonable to believe that more than 80 percent of the QNPFEs will be made directly by the taxpayer.
If a facility ceases to be a qualified nuclear power facility with respect to the taxpayer in a taxable year, the entire amount of the nuclear power facility construction credit is recaptured by an increase in tax equal to the aggregate amount of credit in that taxable year. No credit is allowed under section 45J of the Code for facilities for which a credit is allowed under section 48C and section 48E.
Inclusion of Nuclear Power Facilities in Qualifying Advanced Energy Project Credit
The APA expands and clarifies the 30 percent advanced energy project credit under section 48C of the Code to include investments in property designed to be used to produce energy from advanced nuclear power facilities. To learn about this credit and the projects to which it currently applies, see McDermott’s On the Subject “Applications Now Accepted for Advanced Energy Project Tax Credits.”
Modification of Credit for Production from Advanced Nuclear Power Facilities
The APA also modifies the production tax credit for power produced at an advanced nuclear power facility in section 45J(b) of the Code. Currently, no advanced nuclear power facilities have been able to be constructed or operated in accordance with the statutory requirements of section 45J. Thus, no taxpayers have yet been able to take advantage of this production tax credit.
The APA modification would allow the allocation of the credit to a non-public entity that owns an advanced nuclear power facility through a public-private partnership or jointly with a qualified public entity through a transfer from the qualified public entity. For these purposes, a “qualified public entity” means a federal, state or local government entity, or any political subdivision, agency or instrumentality thereof; a mutual or cooperative electric company; or a nonprofit electric utility that has received a loan or loan guarantee under the Rural Electrification Act of 1936. Although the aggregate amount of the credit claimed by the non-public entity of the facility is subject to certain limitations, this modification expands the applicability of the credit to more nuclear facilities.
In addition, the modification increases the national megawatt capacity limitation set forth in Code section 45J(b)(2) from 6,000 megawatts to 8,000 megawatts.
However, unless further modifications are made to section 45J and the Treasury regulations thereunder, it may be difficult for taxpayers to take advantage of the credit.
Treatment of Qualified Public Entities with Respect to Private Activity Bonds
Pursuant to the APA, tax-exempt bonds would be permitted to be used for public-private partnerships for advanced nuclear power facilities.
Grants for Qualified Nuclear Power Facility Expenditures in Lieu of Tax Credits
The APA would also allow taxpayers (including public power providers and cooperative electric companies) to apply for grants for QNPFEs in lieu of tax credits. The statutory deadline for such applications would be January 1, 2025. Grants would equal 10 percent of the QNPFEs. Payment of the grant would be made during the 60-day period following the later of the date of the grant application or the date the qualified nuclear power facility is placed in service.
In addition to the above nuclear-related provisions, the APA would allocate an additional $5 billion to the section 48C qualifying advanced energy project credit. It would also require the U.S. Government Accountability Office to report to Congress by 2011 on the use of energy-related tax incentives.
Since the APA was introduced, a number of parties have commented for and against various portions of it. Senate Majority Leader Harry Reid (D-NV) has stated that the bill will need “significant bipartisan cooperation” and “broad support” in order to pass this year.