The 80-20 test may be being used incorrectly, an IRS official said.

Charles Ramsey, chief of the IRS branch that handles energy tax credits, said at a conference in Washington in November that the IRS is concerned that people who convert coal- and gas-fired power plants to run on biomass may be applying the 80-20 test incorrectly by taking the position that they built new power plants by merely bolting on expensive conversion equipment while leaving the rest of the power plant unchanged.

The 80-20 test is used in the United States to determine when renovations to an existing power plant or other facility are so extensive that they are essentially construction of a new facility. The test is important because anyone building a new plant may qualify for new tax subsidies.

Under the test, the plant will be considered new if the amount spent on upgrades is more than four times what the plant was worth. Application of the test can leave room for argument; for example, the calculations are supposed to focus only on the equipment considered the core “facility.”

A company can also lose tax subsidies if extensive upgrades are made after a deadline has passed to qualify for tax subsidies. For example, a wind turbine that is extensively rebuilt after 2012 — the deadline to qualify for 10 years of production tax credits on the electricity output — might lose any further tax credits if it is extensively rebuilt in 2013.

STATE TAX CREDIT deals were helped by a US Tax Court decision in December.

Keith Martin