Senators John Kerry and Joe Lieberman have sponsored “The American Power Act” (“APA”), a comprehensive energy and climate change bill. For a summary of the bill, please visit this alert. Among other things, the APA includes significant incentives for the nuclear power industry, including several tax provisions intended to encourage construction of new nuclear power plants. The APA would also establish an expedited procedure for issuing construction and operating licenses for new nuclear reactors, expand the federal loan guarantee program for nuclear energy development, and fund spent fuel recycling research.
Investments in wind, solar and other renewable energy projects currently benefit from a 30% federal investment tax credit and an election to convert the credit into a cash grant from the Treasury Department. Nuclear power plants do not benefit from these incentives and the APA would address this deficiency for new nuclear power plants. The following tax provisions would be effective for property placed in service on or after the date of enactment.
Five-Year MACRS Depreciation for Tangible Property Used in Nuclear Power Plants
Under current law most expenditures for tangible property used in the construction of a nuclear facility may be recovered through accelerated tax depreciation deductions over a 15-year recovery period. The APA would reduce the recovery 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” to five years. An “advanced nuclear power facility” is one whose reactor design was approved by the Nuclear Regulatory Commission after 1993. (No existing nuclear plants have reactor designs approved after 1993, so this provision would not apply to additions to existing plants.)
New Investment Tax Credit for Nuclear Power
Under current tax law (section 45J of the Internal Revenue Code), certain nuclear power plants are eligible for a production tax credit (“PTC”) similar to the section 45 PTC for wind and other renewable energy projects. The section 45J credit is not convertible into an investment tax credit or a Treasury grant.
The APA would create a new 10 percent investment tax credit for certain expenditures for nuclear power facility construction (new section 48E of the Code). The credit amount would be 10 percent of the qualified nuclear power facility expenditures (“qualified expenditures”) 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 that will use nuclear power to produce electricity. Qualified expenditures are amounts paid, accrued or properly capitalized with respect to a qualified nuclear power facility before the facility is placed in service, for which tax depreciation deductions are allowable once the facility is placed in service.
Under the proposal, taxpayers could elect to take into account “progress expenditures” for purposes of the credit. When qualified expenditures may be taken into account as “progress expenditures” depends on whether the facility is self-constructed. For a self-constructed facility, qualified expenditures would be taken into account no earlier than the taxable year in which the expenditures are properly capitalized. For a facility that is not self-constructed, the expenditures are taken into account in the taxable year in which 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 qualified expenditures as progress expenditures, it is reasonable to believe that more than 80% of the qualified expenditures will be made directly by the taxpayer. Costs of certain components are deemed not self-constructed if the expected cost of the component exceeds five percent of the expected cost of the entire facility. Other limitations would apply to annual allowable progress expenditures for non-self constructed property.
The proposed investment tax credit for new nuclear construction would not be allowed if the any person has claimed the section 45J production tax credit with respect to the facility in any taxable year.
The tax basis of property for which the new 10% tax credit is allowed is reduced (for purposes of calculating tax depreciation deductions, by 50% of the amount of the credit.
If enacted, the new investment tax credit for new nuclear construction would not give rise to a tax preference for purposes of the alternative minimum tax.
The new 10% credit, including credits claimed for progress expenditures, would be subject to recapture if the facility ceases to be a qualified nuclear power facility with respect to the taxpayer in the first five taxable years after placement in service. Like the current section 48 investment tax credit, the new credit would be recaptured ratably (100% in the first year, 20% in the fifth year). For this purpose, a facility shall “cease to be a qualified nuclear power facility” when the taxpayer sells, disposes of, or cancels, abandons or otherwise terminates the construction of the facility (except for sales or dispositions between members of the same affiliated group). However, a delay or temporary cessation of construction will not be treated as a recapture event if “work is subsequently resumed on the construction of the facility.”
Treasury Grant In Lieu of Section 48E Credit
The APA would also allow to a limited class of taxpayers – certain public power providers and cooperative electric companies — to apply for Treasury cash grants in lieu of the new section 48E 10% investment tax credits. “Public power suppliers” are state utilities with a service obligation (as defined in the Federal Power Act) and a “cooperative electric company” means a mutual or cooperative electric company described in section 501(c)(12) or 1381(a)(2)(C) of the Code. No other taxpayers are eligible for the conversion of the 10% credit into a cash grant. The grant program applications and approvals would be administered similarly to the current program providing for grants in lieu of the section 48 30% investment tax credit. See this alert for a description of the current grant program. Grants would equal 10% of the qualified nuclear power facility expenditures. Tax basis would be reduced by 50% of the grant. 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. The grant would be subject to recapture under rules similar to those currently applicable to grants in lieu of section 48 credits. Use of the nuclear plant by a state or federal governmental entity (e.g., under a lease or power purchase agreement) will not disqualify the grant.
30% Manufacturing Income Tax Credit for Nuclear Power Facilities
The APA would confirm that the section 48C 30% credit for investments in facilities that manufacture property used to generate renewable energy applies to nuclear power. The manufacturing tax credit would include investments in “property designed to be used to produce energy from advanced nuclear power facilities” and would be expanded to include an additional $5 billion of credits to be allocated. This credit should be distinguished from the new 10% credit. The new section 48E 10% investment tax credit would apply to costs of tangible property that are part of nuclear power plants that generate electricity. The section 48C 30% tax credit would apply to expenditures that re-equip, expand or establish a manufacturing facility for the production of property designed to be used to produce energy from a qualified nuclear power facility (e.g., the expansion of a facility used to manufacture components of a nuclear plant, such as nuclear fuel rods). The section 48C manufacturing credit is not convertible into a Treasury cash grant.
Modification of PTC for Nuclear Power Facilities
The APA would enlarge the section 45J production tax credit for power produced and sold by a qualifying nuclear power facility by increasing the national limitation from 6,000 to 8,000 MWs and would modify the credit where the facility either is co-owned by a public entity and a non-public entity, or is owned by a partnership or joint venture between or among public and non-public entities (“public-private partnerships”). In these cases, the parties could elect to transfer to the non-public party all of the PTCs that would otherwise be allocated to the public party. For these purposes, a “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 non-profit electric utility that has received a loan or loan guarantee under the Rural Electrification Act of 1936. The aggregate amount of the credit claimed by the non-public entity of the facility would be subject to certain limitations.