The Internal Revenue Service recently released guidance on an advanced nuclear tax credit provision that public power project developers have been waiting for since changes to the provision were enacted in 2018.
Among other issues, the notice (Code section 45J Advanced Nuclear Tax Credit) helps clarify the ability of public power utilities to make an election to transfer the credit to other project partners.
In general, under 45J if a facility is owned by a partnership, then the partnership -- and not the partners -- are treated as the taxpayer owning the facility. In effect, one decision – whether to transfer or not to transfer – would apply to all project partners.
This would be problematic for facilities jointly owned by a public power utility that wanted to transfer credits, and an investor-owned utility that did not.
The notice addresses this by stating that if an organization makes a valid election under Code section 761(a) then each member’s “undivided share in the facility will be treated for purposes of this notice as a separate facility owned by such member.” In other words, each entity could make its own election without forcing a decision on the other owners.
Additionally, the guidance could offer good news for public power utilities hoping to invest in joint projects and claim new direct pay tax credits.
Code section 6417 states that if a tax creditable facility is owned by a partnership, then the partnership, not the partners, must make any election for direct payment.
As with 45J the issue is that one decision – whether to elect for direct payment or not – would apply to all project partners. Guidance is still pending, but a similar decision – allowing joint project owners to opt out of partnership treatment -- would clear the way for joint ownership of facilities without putting the ability to claim refundable direct payment tax credits at risk.
The notice could also offer clarity for joint action agencies. As with the other production tax credits, to qualify for the Advanced Nuclear Tax Credit, power must be sold to an unrelated person.
The issue can become muddled when a JAA is the owner of the facility, for example where the JAA is selling power to a utility that may be a part owner of the JAA or part of the JAA’s governance structure. The notice clarifies this issue by stating that for purposes of 45J electricity will be treated as sold to an unrelated person if the ultimate purchaser off the electricity is not related to the person that produces the electricity.
“Thus, the requirement of a sale to an unrelated person will be treated as satisfied if the producer sells the electricity to a related person for resale by the related person to a person that is not related to the producer,” the notice concludes.