Merchant power companies sometimes try to structure payments from utilities for electricity as “advance payments” allowing the amounts to be reported as taxable income over time. An advance payment is a payment for “goods” to be delivered in the future. The payment can be reported for tax purposes over the same period the goods are delivered. This approach is sometimes used when a merchant power company receives a payment from a utility to “buy down” the price for electricity under a long-term contract. The buydown payment is structured so that it qualifies as an advance payment for electricity to be delivered over the remaining term of the contract in the hope that the buydown payment can be reported over the same period.

The IRS is working on guidance about advance payments. Sharon Kay, a US Treasury official, told an American Bar Association meeting in October that the guidance will address when payments are considered for “services” rather than “goods.” Only payments for goods can be deferred. The guidance is also expected to address renewable and multiyear contracts.

Keith Martin