Advance Payments

Advance Payments

April 24, 2015 | By Keith Martin in Washington, DC

ADVANCE PAYMENTS get attention from the IRS.

IRS officials are suggesting that new regulations the agency is expected to release soon on “prepaid forward contracts” may be a complete revision of existing rules rather than an incremental change. They could affect the pattern in which income must be reported under prepaid power purchase agreements. The IRS committed in its current business plan to issue the regulations by summer.

Current IRS rules allow a company that is paid in advance for “goods” that will be delivered in the future to report the prepayment as income over the same period the goods are delivered. However, the company cannot report its book income from the sale any more rapidly than it reports the income for tax purposes, and the prepayment cannot be so large that the company has locked in a profit from the sale.

Some wind and solar companies have signed long-term power purchase agreements with utilities where the utilities pay in advance for a share of the electricity to be delivered over the contract term.

The prepayment is like a loan that the renewable energy companies repay in kind with electricity. The arrangement is beneficial because the utility usually has a lower cost of capital that it can effectively extend to the project in exchange for a discount on the electricity it is purchasing.

by Keith Martin in Washington