Depreciation bonus issues should be addressed soon | Norton Rose Fulbright
The United States offers a “depreciation bonus” as an inducement to companies to invest in new plant and equipment during a window period that started after the terrorist attacks on September 11, 2001 and continues through 2004 or 2005, depending on the investment. The bonus is 30%. In other words, a company can deduct 30% of its cost of the plant and equipment immediately. It depreciates the other 70% of the cost as it would normally. The tax savings from the faster depreciation are worth as much as 5.39% of the cost of a power plant.
Power companies had a number of questions about how the bonus applies to power projects. Most were resolved in a “blue book” that the staff of the Congressional Joint Committee on Taxation issued in late January. However, the industry has been waiting to see what technical corrections Congress makes to the statute and how the IRS addresses other open issues in regulations expected out this summer.
Regulations have been drafted, but have not been reviewed outside the IRS branch that handles depreciation bonus issues. However, Treasury officials – who must review the regulations for policy input – say they intend to get to them by late April or May with the aim of publishing them this summer. There had been talk of delaying any regulations until Congress finishes revising the statute. Several “technical” corrections are expected. However, Treasury officials have decided not to wait. A meeting is expected with Treasury officials in May to review the remaining list of power industry issues.
The technical corrections to the statute are expected to include an “anti-churning rule” that would prevent a company with a project that does not qualify for a bonus – because construction started before September 11, 2001 – from trying to convert the project into eligible property by selling and leasing it back or by selling it before construction ends to a related party. An open issue has been how “related party” will be defined. The text of the technical corrections is expected to be released this spring.
Meanwhile, IRS officials say they have heard few companies are actually claiming the bonus. They attribute this to the slowdown in the economy.
The most common question the IRS is being asked about the bonus is how to elect out of it. Smaller companies do not want the bonus because it is not worth the trouble of keeping two separate accounts since many states do not allow the bonus to be claimed for state income tax purposes. At last count, 25 states have opted out of the bonus and another six states allow only a partial or delayed bonus.