Power plant repairs get attention from the IRS | Norton Rose Fulbright
The IRS said in mid-July that it will try to work out an agreement with the power industry about when money spent on maintenance at power plants can be deducted as a “repair” or must be recovered over time as an “improvement.”
The issue comes up frequently on audit. The Edison Electric Institute had been asking the agency to negotiate a settlement with the industry as part of the IRS’s “industry issue resolution” program. The IRS declined to devote resources to it last year. However, in July, it put the subject on the agenda for this fall or winter (along with issues affecting six other industries).
It is not clear yet what form the guidance will take. It could be a “revenue procedure” or notice. The principal focus is to resolve the issue for future years, but the IRS said resolution could also lead to a settlement of cases on audit. Meetings are expected between the power industry and government officials to come up with bright lines that are acceptable to both sides.
The IRS worked out a similar settlement with the airline industry in January 2001 after years of negotiation and litigation. The airlines typically deduct the cost of heavy maintenance of the kind that is done once every eight years and involves stripping down the airplane to inspect parts and replace ones that are worn. Large commercial airliners are expected to last 25 years.
The airline guidelines are in Rev. Rul. 2001-4. The IRS will probably use them as a starting point in discussions with the power industry.