DEPRECIATION BONUS regulations are still on track to be issued by September 9.

DEPRECIATION BONUS regulations are still on track to be issued by September 9.

August 01, 2003
DEPRECIATION BONUS regulations are still on track to be issued by September 9.

Meanwhile, the IRS released a “technical advice memorandum” in June that may help some companies argue that they should get a depreciation bonus.

The United States is offering companies the chance to write off at least 30% of the cost of new plant and equipment immediately as an inducement to invest.  This is a limited-time offer that applies to new equipment put into service during a “window period” that runs from September 11, 2001 through 2004 or 2005, depending on the investment. Congress increased the bonus to 50% for investments after May 5 this year in the hope of spurring even more investment.

A company cannot have committed to the investment before the start of the window period. For most power projects, this mean that construction cannot have started on the project before September 11, 2001. Custom — designed projects like power plants are considered “self constructed.”

The technical advice memorandum in June involved a utility that wanted to qualify in the late 1980s for an investment tax credit on its spending on 35 separate work orders for things like substation upgrades and customer hookups. In order to qualify for work the utility was doing itself — or “self constructing” — the utility had to show it had committed or incurred at least $1 million or 5% of the total project cost by December 1985. The IRS concluded in the technical advice memorandum that these were 35 separate projects. Therefore, the utility could not pool the costs to meet the dollar threshold.

This helps with the depreciation bonus because, even if one “project” was tainted due to work having started before September 11, 2001, other projects may not have been.

A technical advice memorandum is a ruling by the IRS national office to settle a dispute between a taxpayer and an IRS agent stemming from an audit. The ruling is TAM 200324003.

Keith Martin