Property taxes and interest add to basis
Solar and wind developers were helped by a US Tax Court decision in December.
The court suggested that property taxes a developer pays on land and interest paid on debt to buy the land must be added to basis in the project eventually built on the land. This means a higher investment tax credit on the project.
The decision also suggests that the cost of meteorological data that wind developers gather to test whether a site is suitable for a wind farm are a cost of the turbines ultimately erected on the site rather than the land.
The case involved three partnerships that bought land and planted almond trees. The partners wanted to deduct property taxes on the land and interest on debt borrowed to acquire the land.
The court said that section 263A of the US tax code requires that the two amounts be capitalized, or added to basis, and the court went further to say they are added to the tax basis in the almond trees grown on the land rather than to basis in the land.
Section 263A requires the costs of “real or tangible personal property produced by the taxpayer” to be capitalized.
The power industry is accustomed to capitalizing property taxes paid during construction. The taxes in this case were paid over three years while the partnerships were growing almond trees. The court did not address whether the partnerships will be required to continue capitalizing property taxes after the initial growing period ends. However, its logic suggests that it was focused solely on property taxes paid during construction. It said that allowing a current deduction for the property taxes would violate a matching concept in the US tax laws that costs ought to be matched to the related income. The capitalized property taxes are a cost to put in almond trees that will produce income in future years.
Construction-period interest must be capitalized on any project that will cost more than $1 million and that has an estimated “production period” of more than a year. The production period for “real property” starts when physical work starts at the site or at a factory. The production period for equipment and other “tangible personal property” starts when the accrued costs reach at least 5% of the total expected cost. It ends when the project is ready to be placed in service.
The case is Wasco Real Properties I, LLC v. Commissioner.