Renovation of the Willard Hotel could provide a multi-million-dollar windfall tax break for the developer eventually chosen for the project by the Pennsylvania Avenue Development Corp.

The tax break is not assured at present, but it is possible; a "technical amendment" to the federal tax code that would make it certain has been introduced in the Senate.

The 1976 Tax Reform Act, included provisions giving special tax benefits to encourage rahabilitation and renovation of buildings designated historic landmarks.

The most important of these tax advantages allows the entire cost of renovating a historic structure to be amortized - deducted for tax purposes - over five years. Normally rehabilitation expenses must be depreciated over the life of the building, usually 30 years.

The result of the quick write-off is that the expense of renovating a historic building can be used to shelter from taxes the income earned from other sources.

How big the tax break on the Willard renovation might be depends on the financial status of the developer who wins PADC's appointment for the job.

Estimates are that restoring the Pennsylvania Avenue hotel to its original, turn-of-the-century grandeur will cost $30 million to $40 million. A company with sufficient other earnings could deduct that amount from its tax bills over the five-year period.

There is one hitch: Under present plans for the Willard, the project does not qualify for the massive tax break.

PADC, which bought the gutted hotel for $4.55 million, plans to lease the structure to the chosen developer. Improvements on leased property are not covered by the law.

PADC could eliminate the disqualification by selling the land to the developer, but the agency would prefer to keep the property in public hands.

Sen. Bennett Johnston Jr. (D-La.) has proposed and the Senate Finance Committee has accepted, an amendment to the tax law extending the tax benefits to leased buildings. Calling the Willard "exactly the kind of situation we are trying to get to," an aide to Johnston said many historic buildings owned by public and private groups are leased to profit-making developers.

The National Trust for Historic Preservation, which backed the original five-year write-off, is also behind the extension. Congress never intended to exclude leased property. Trust officials contend. The preservations contend the tax break for historic rehabilitations is needed because of the high costs involved. It often is cheaper to demolish an old building and start from scratch on a new one.

Treasury opposed the original tax break for historic renovations - preferring direct grants over tax incentives - and also opposes the extension. Also against the break are liberal tax "reformers" who regard the tax incentive for rehabilitation as "rewarding developers for doing what they were going to do anyway."

In the two years since it became law, the quick write-off for renovating historic structures has proved popular with business. The National Trust said several hundred firms have sought the historic site certification needed to qualify for the tax break.

Business interests now are pushing for an investment tax credit for historic preservation and for other tax incentives that developers contend are needed to make it equally attractive to fix up an old building or tear it down and build a new one.

Several of the nine developers bidding for the Willard have indicated - in their proposals and in interviews - that they are counting on the quick write-off. So far none has claimed it is essential.

Whether the tax break for renovation of the Willard represents a windfall profit for the developer or an economic incentive that assures the project's viability will have to be evaluated by NADC directors.

In making a deal with a developer to reopen the Willard, the agency ought to be sure it is not making extraordinary concessions on a project that has a built-in bonus in taxes.

The PADC is moving to head off potential criticism on another issue - conflicts of interest between PADC board members and developers bidding on the Willard and the National Press Building block project.

The conflicts start at the top, PADC's chairman, Gen. Elwood Quesada, is chairman and chief executive of L'Enfant Plaza Properties, the partner with Loew's Corp. in Loew's L'Enfant Plaza Hotel. Loew's is also one of the hotel companies that has submitted proposals for the Willard.

The agency's staff has written the board members, listing the companies involved in the Willard project, and asking them to disqualify themselves if there are any conflicts, PADC press officer Rita Abraham said yesterday.