Repairs at power plants and other facilities are more likely to be deductible after a court decision in September | Norton Rose Fulbright
Repairs at power plants and other facilities are more likely to be deductible after a court decision in September.
The IRS has been struggling to draw a clear line for utilities, airlines and other industries about when spending on an existing plant can be deducted immediately as a “repair” and when it must be capitalized as a longer-term “improvement” and deducted over time as asset depreciation. The more quickly the cost of work can be deducted, the less expensive it is after taxes are taken into account.
Federal Express argued that work it did on its aircraft engines qualified as “repairs” rather than “improvements.” Some of the maintenance work was done in regular 2- to 3-year intervals. Other such work was done in 5-year intervals. The engines were disassembled and worn parts replaced. Most trips to the repair shop cost between $150,000 and $300,000, but in some cases, the cost reached as much as $900,000 or $1.1 million per engine.
A federal district court in Tennessee ruled in mid-September that the work qualified as repairs because the “unit of property” is not the engine standing alone but the entire aircraft. Obviously, $100,000 spent on an aircraft looks less significant than the same amount spent on just an engine. The case is FedEx Corp. v. United States.
The IRS is working on a revenue ruling that is expected to describe three fact patterns involving power plants and draw lines between repairs and improvements. However, the IRS task force that is working on the ruling cannot agree what is the “unit of property.”
The task force feels certain that the entire power plant is not a single item of property. It believes each turbine — and perhaps even something larger — is a separate item of property. It does not know where to draw lines on boilers. The ruling will skirt this issue.