Depreciation bonus issues inch closer to resolution

Depreciation bonus issues inch closer to resolution. | Norton Rose Fulbright

February 01, 2003 | By Keith Martin in Washington, DC

DEPRECIATION BONUS issues inch closer to resolution.

The US government began offering a 30% “depreciation bonus” last March as an inducement to US companies to invest in new plant and equipment.  The bonus is available only for new investments during a “window period” that runs from September 11, 2001 through 2004 or 2005, depending on the investment.

Power plants and other infrastructure projects take a long time to build.  Most projects that qualify potentially for a bonus were under development before September 11, 2001.

The Joint Tax Committee staff in Congress answered some questions that power companies have about the bonus in a “blue book” in late January.  The blue book suggests that most power plants will qualify for a bonus as long as construction did not start at the site before September 11, 2001.  A question had arisen whether a project would qualify if the turbines were ordered before September 11.  The blue book makes clear that a mere turbine order does not taint the project.  The project will still qualify for a bonus.  However, the blue book did not answer whether the bonus can be claimed on the turbine itself.  Congressional staff could not agree.

The blue book also addresses what happens in a case where a project developer would not have qualified for a bonus on his project because work on it started too early, but the developer must sell the project before it is completed.  Many merchant power companies are having to shed assets to pay down debts.  The blue book says that a new purchaser who completes construction will qualify for a bonus on the project, assuming the project is completed before the end of the window period, despite the fact that the original developer would not have qualified for a bonus.  Power companies had asked whether the new purchaser can claim a bonus on the full cost of the project — including what he pays to acquire the work in progress — or only on his spending to complete construction.  The Joint Committee staff said the bonus can be claimed on the full cost.

However, the blue book indicates that Congress will adopt an “anti-churning rule” to prevent companies that do not qualify for a bonus from “churning” assets in order to give the bonus to someone else.  An example of a churning transaction is where a project is sold and leased back by the developer or sold to a related party before construction is completed.

Meanwhile, the Internal Revenue Service has completed a first draft of regulations to implement the depreciation bonus.  The regulations are expected to be issued this summer.

Keith Martin