February 01, 2010 | By Keith Martin in Washington, DC

Waste may be about to get a new definition for US tax purposes.

The word is important because US power plants that burn waste can be financed in the tax-exempt bond market, even though they are privately owned.

In addition, power plants that burn waste and facilities that convert it into solid, liquid or gaseous fuels can be depreciated for tax purposes on an accelerated basis over seven years.

The word may also be important to whether power plants that burn biomass can receive cash grants from the US Treasury for 30% of the project cost.

“Waste” is defined currently for tax purposes as material that has no value in the place where it is located. Therefore, power companies that want to claim they use waste are careful not to pay anything for the fuel. They may pay to collect, sort and transport the material, but not for the underlying material itself.

Recyclers have never been happy with this definition. Their interest in recycling material creates a market for it.

The IRS has been trying to come up with a new definition since 2002, but with limited success. It proposed a brand new approach in October. Only one witness testified at a hearing on the new definition in January, suggesting most of the market can live with what the agency proposed.

Under the new definition, whether someone pays for the material does not matter.

However, it must be either “used” or “residual” material and be expected to be used “within a reasonable time after purchase or acquisition in a qualified solid waste disposal process,” such as being burned in a power plant to make steam.

“Used” means it was used once by someone else.

“Residual” is what is left over after converting raw material into an agricultural, commercial, consumer or industrial product, but the leftovers cannot represent more than 5% of the original raw materials and they must be worth less than the product.

This residual test is hard to apply. The January witness, testifying for the National Association of Bond Lawyers, urged the IRS to drop the 5% limit.

In a helpful step, the IRS included as part of its new definition that anyone converting waste into energy would be able to introduce up to 35% non-waste to “accommodate . . . processes that require” use of other inputs besides waste and still be considered to be using all waste. 

Keith Martin