Power plant repairs
The IRS is working on a set of bright-line tests for deciding when spending on an existing power plant qualifies as a “repair” versus an “improvement.” The cost of repairs can be deducted immediately. The cost of improvements must be recovered over time as the power plant depreciates. The quick deduction makes repairs less expensive after the tax effects are taken into account.
The line between them is often fuzzy. Power companies are challenged frequently by the IRS on audit. The hope is that clearer rules will let the IRS and taxpayers spend their time arguing about other things.
The IRS plans to brief representatives from the power industry at the December meeting about what it is considering proposing. An IRS official said the meeting is “not a negotiating session,” but merely a chance to ask questions.
Judging from questions the agency has been asking the industry trade associations, IRS officials seem inclined to treat a power plant as many separate pieces of equipment — for example, turbine, precipitator, boiler, generator, pulverizer. This would make it harder to claim that work was a “repair” since the cost will seem more significant in relation to the article being repaired. For example, $100,000 spent for work on a “power plant” seems less significant than the same money spent on just the boiler.
The IRS issued a similar set of bright-line tests for the airlines in early 2001. A revenue ruling directed at the power industry is expected early next year.