A Depreciation Bonus

A depreciation bonus

December 01, 2002

A depreciation bonus will be harder to claim on power plants if changes that key members of Congress proposed in November are enacted.

Congress enacted a 30% “depreciation bonus” last March as an incentive for US companies to make new investments during the period September 11 last year through 2004 or 2005, depending on the project. The hope was this would help jump start the economy. The bonus reduces the cost of a new gas- or coal-fired power plant by as much as 5.39%.

Frustratingly, Congress has still not settled on the rules for the bonus more than a year into the eligibility period.

A company cannot claim the bonus on a project to which it was “committed” before September 11 last year. The idea was to reward new investments after the terrorist attacks. An open issue is what it means to be “committed.” Most power companies have assumed that as long as construction had not started at the site by September 11, a project should qualify. This is based on language in the Congressional committee reports when the depreciation bonus was enacted.

However, a “technical corrections” bill that the chairmen of the House and Senate tax-writing committees introduced in November would deny the bonus on any project for which a written binding contract was in effect before September 11 last year. The bill was put out for comment. Odds are that it will be enacted next year. A binding contract before September 11 last year would forever taint the project: no one could claim a bonus on it — even if a new investor is found during construction to complete a project that the original developer has abandoned. This rule would apply retroactively.

Two other issues remain in play. The Joint Tax Committee staff is working on a “blue book” that may address these other issues.

One is what to make of the fact that many power companies signed master contracts to buy multiple turbines well before September 11 last year and without knowing at which projects the turbines would be used. The issue is whether a bonus can be claimed on such turbines if they are used at a project that otherwise qualifies.

The other open issue is the Joint Tax Committee staff has held open the possibility that an institutional equity participant that invests in a project while it is still under construction might be able to claim a bonus on its spending — after it buys into the project — to complete construction, even though the project would not otherwise qualify for a bonus in the hands of the original developer. It could not claim a bonus on its purchase price to buy into the project.

The “blue book” is expected out around year end.