Ethanol plants must be depreciated over seven years, the IRS said in May.
Some ethanol producers have been depreciating their plants over five years on the theory that the plants are used to produce chemicals. Assets used for the “manufacture of chemicals and allied products” belong in asset class 28.0 and may be depreciated on an accelerated basis over five years.
However, the IRS said such plants belong in a different asset class, 49.5, used for “waste reduction and resource recovery plants” as this category includes equipment used to “process . . . biomass to a . . . liquid . . . fuel.” 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 IRS made the announcement in Rev. Rul. 2014-17. The ruling described a facility that produces ethanol from corn and sells carbon dioxide as a by-product.
The latest ruling does not come as a surprise. The IRS released an internal legal memo in 2008 suggesting that it was challenging ethanol producers on their depreciation.
by Keith Martin