Wildfire fund contributions

Wildfire fund contributions

June 15, 2021 | By Keith Martin in Washington, DC

Utility contributions to a state fund to cover damages after a weather event create an intangible property right.

The utility can deduct the cost ratably over 15 years, the IRS said in a private letter ruling made public in May.

The ruling is Private Letter Ruling 202119007.

It appears to address a fund that California established in 2019 to deal with damages caused by wildfires. The fund is capitalized partly by the state and partly by contributions by participating utilities. Each participating utility had to make an initial contribution and then make ongoing annual contributions for an agreed period.

The IRS said the fund will be used to reimburse participating utilities for any “eligible losses” as defined in the state statute creating the fund.

Companies can deduct costs of doing business. Such costs can be deducted currently unless the spending creates an asset that will last more than a year, in which case the cost must be capitalized into the asset basis and recovered through depreciation or amortization.     

Amounts set aside to pay damages are not usually deductible until the damages have to be paid.

In this case, the contributions bought the utility a form of liability shield and the possibility of recovering some of its losses from the fund. (For more detail on now the California wildfire fund works, see “California moves forward” in the October 2019 NewsWire.)

The IRS analogized the contribution to a payment for a government permit or license that the US tax code treats as a “section 197 intangible” whose cost can be recovered ratably over 15 years. IRS regulations offer the following other examples of rights that fit in this category: “a liquor license, a taxi-cab medallion (or license), an airport landing or takeoff right (sometimes referred to as a slot), a regulated airline route, or a television or radio broadcasting license.”

The IRS said the initial contribution can be deducted ratably — meaning in equal amounts — over 15 years. It said the subsequent contributions can be recovered ratably over the remainder of the original 15-year period.