Biofuel producers are being challenged by the IRS on two issues on audit.

One is how the plants are depreciated for tax purposes. The IRS position is that plants that make liquid fuels from corn or other “biomass” must be depreciated over seven years on grounds that they fall into depreciation class 49.5, which covers “assets used in the conversion of . . . biomass to heat or to a solid, liquid or gaseous fuel.” Many plant owners have been depreciating their plants over five years by arguing that they are in the business of manufacturing chemicals. The difference in depreciation is worth 2¢ per dollar of capital cost. The loss in tax subsidy to a typical ethanol plant is about $4 million.

The agency explained its position in an internal legal memorandum that the agency made public in April. It is ILM 200814025.

Many US biofuel producers receive annual payments from the Commodity Credit Corporation, which is part of the US Department of Agriculture. The payments are tied to increases in annual output of biofuels made from eligible commodities. The eligible commodities include corn, barley, grain sorghum, oats, rice, wheat, soybeans, sunflower seeds, canola, crambe, rapeseed, safflower, sesame seeds, flaxseed, mustard and cellulosic crops such as switchgrass and hybrid poplars.

 Some biofuel producers are taking the position that the payments do not have to be reported as income. The IRS issued a “coordinated issues paper” calling the attention of its field agents to the problem.

The IRS said the payments are a supplement to earnings and are no different than the revenue the producers collect from selling the output from their plants. The coordinated issues paper is LMSB-04-0308-019. The agency released it in April.

Keith Martin