Improvements to power plants
Improvements to power plants should be easier to distinguish from repairs in the future after an IRS revenue procedure in April that breaks power plants down into smaller “units of property” and “major components.”
Power companies can deduct amounts spent on repairs immediately. They must capitalize amounts spent on improvements, meaning add them to basis in the power plant and recover them through depreciation of the power plant over time. It is usually preferable to claim something is a repair to get the faster tax deduction. However, in projects that qualify for investment tax credits, it may be better to treat the amount as an improvement so that an additional tax credit can be claimed.
The IRS said it will not challenge power companies that treat the cost of replacing a “unit of property” or “major component” as an improvement. The revenue procedure lists all the units of property and their major components at coal- and natural gas-fired and nuclear power plants. A coal-fired power plant can be broken into 27 units of property, and each unit of property has from zero to eight major components. Examples of units of property are boilers, turbines, scrubbers, cooling water systems, condensers and continuous emissions monitoring systems. A turbine, for example, has four major components: the shell and casing, the instrumentation and controls, the complete blade set and the shaft.
These classifications can only be used by companies in the business of selling electricity or steam. They do not apply to alternative energy facilities. The information is in Revenue Procedure 2013-24.
The trade association for the regulated utilities, the Edison Electric Institute, worked for years with the IRS on the classifications. Both sides hope it will reduce the number of disputes in tax audits.