2018 Deloitte Renewable Energy Seminar · 2019-10-22 · 2018 Deloitte Renewable Energy Seminar...

2018 Deloitte Renewable Energy SeminarScaling new heightsAugust 15-17, 2018

Tax reform, tax

extenders, and technical corrections

Gary Hecimovich, [email protected], Partner, Deloitte Tax LLPTom Stevens, [email protected], Partner, Deloitte Tax LLP,Dave Yankee, [email protected], Managing Director, Deloitte Tax LLPJoe Zenk, [email protected], Managing Director, Deloitte Transactions and Business Analytics LLP

Copyright © 2018 Deloitte Development LLC. All rights reserved. 32018 Deloitte Renewable Energy Seminar

Recent federal income tax legislation

Limitation on deductibility of net business interest expense (Section 163(j))

Bonus depreciation (Section 168(k))

Extenders

Contributions in aid of construction (“CIAC”)

Base erosion and anti-abuse tax (“BEAT”)

Qualified opportunity zones (“QOZ”)

Revenue recognition (Section 451)

Discussion Topics


• Tax Cuts and Jobs Act (“TCJA”) (P.L. 115-97)

− Despite proposals to eliminate or modify many tax credits, most left unchanged

◦ New considerations including Bonus Depreciation, BEAT, AMT, NOLs

− QOZ incentives

• Bipartisan Budget Act (“BBA”) of 2018 (P.L. 115-123)

− Extensions or expansions of most federal tax credits

• Tax Technical Corrections Act of 2018 (P.L. 115-141)

Significant provisions affecting renewable energy investmentsRecent federal income tax legislation


Limitation on deductibility of net business interest expense


Section 163(j)Limitation on deductibility of net business interest expense

• Limits the deduction for business interest to the sum of

−The business interest income of the taxpayer for the taxable year

−30 percent of the adjusted taxable income of the taxpayer for the taxable year, and

−The floor plan financing interest of the taxpayer for the taxable year

• Adjusted taxable income is computed without regard to

−For all tax years

◦ Any item of income, gain, deduction, or loss which is not properly allocable to a trade or business,

◦ Any business interest or business interest income,

◦ The amount of any Section 172 net operating loss deduction, and

◦ The amount of any deduction allowed under Section 199A related to qualified business income

−For tax years beginning before January 1, 2022

◦ Any deduction allowable for depreciation, amortization, or depletion


Section 163(j) (continued)Limitation on deductibility of net business interest expense

• Permits disallowed interest deductions to be carried forward indefinitely, subject to certain restrictions applicable to partnerships

• Exceptions for certain industries and taxpayers with average gross receipts of $25 million or less

• Effective date – applies to taxable years beginning after December 31, 2017


ConsiderationsSection 163(j) interest deduction limitation

• Definition of business interest – exclusions to the definition of a trade or business

• Computation of ATI – exclusions for items not allocable to a trade or business

• Limitation determined at pass-through entity

• Consolidated return considerations

• Utilization of carryforward of disallowed business interest

• Modeling impact for pre-2022 tax years and impact of limitation based on EBIT


Proposed regulations to address the following areasIRS Notice 2018-28

• Carryforward and treatment of disallowed interest under former Section 163(j) (Section 3 of the Notice)

− Treated as business interest paid or accrued in tax year beginning after December 31, 2017

− Subject to new Section 163(j)

− Potentially subject to Section 59A (BEAT)

− Rules for allocation of business interest expense from an affiliated group under the prior “super-affiliation rules”

− Clarification that no excess limitation carryforward may be carried to tax years beginning after December 31, 2017

• Characterization of C corporation business interest expense and income (Section 4 of the Notice)

− All interest paid or accrued of a C corporation as business interest and all interest includible as business interest income


Proposed regulations to address the following areas (continued)IRS Notice 2018-28

• Consolidated Approach to section 163(j) (Section 5 of the Notice)

− ATI shall be determined based on consolidated taxable income

− Intercompany obligations will be disregarded for purposes of determining the limitation

− Allocations of interest expense limitation among group members

− Treatment if disallowed interest carryforward when members leave and join the group

− Application of new Section 163(j) to a consolidated group with one or more members that conduct an exempt trade or business

− Electing real property trade or business

− Electing farming business

− Regulated utilities

• Impact on E&P – disallowance and carryforward of interest will not affect whether or when E&P is reduced (Section 6 of the Notice)


• TJCA legislative history confirms that interest capitalization provisions apply before the interest limitation of new section 163(j)

• When interest is capitalized, it loses its character as interest, and the interest limitations of new section 163(j) do not apply

• Capitalized interest becomes part of the basis of the asset, and is recovered through

−Depreciation or amortization

−Cost of goods sold (COGS)

−Offset to amount realized in a sale or exchange

Interest capitalization planning considerations


• Section 263A(f)

−Part of the uniform capitalization (UNICAP) rules

−Extensive and detailed regulations

−A method of accounting under sections 446 and 481

• Section 266

−Provision dates from 1942

−Relatively little used

−Regulations are less detailed than the UNICAP rules

−Annual election

Interest capitalization provisions


Transition issues facing regulated utilitiesLimitation on deductibility of net business interest expense

• IRS Notice 2018-28 – forthcoming regulations (comments due May 31, 2018)−Application of the limitation to a consolidated group with one or more members that conduct a trade or business excepted from the limitation and one or members subject to the limitation

• Scope of “rates . . . established or approved by a . . . commission” • What is “properly allocable?”

−Allocate indebtedness−Whether a pure allocation of consolidated interest must occur or whether separate company accounting, ratemaking and structure of acquisition indebtedness matter◦ Is tracing permitted, required or prohibited?◦ Holding company acquisition indebtedness

• How to compute and allocate adjusted taxable income

• Treatment of depreciation associated with manufacturing equipment treated as an inventoriable cost and deducted as cost of goods sold

• Do interest deductibility limitation computations constitute a method of accounting for tax purposes?


Section 163(j)(7)(A)(iv) – utility industry exemption

(7) TRADE OR BUSINESS.—For purposes of this subsection—

(A) IN GENERAL.—The term ‘trade or business’ shall not include — . . .(iv) the trade or business of the furnishing or sale of—(I) electrical energy, water, or sewage disposal services,(II) gas or steam through a local distribution system, or(III) transportation of gas or steam by pipeline,

if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative.

Section 168(i)(10) – public utility property definition

Public utility property.—

The term "public utility property" means property used predominantly in the trade or business of the furnishing or sale of—(A) electrical energy, water, or sewage disposal services,(B) gas or steam through a local distribution system,(C) telephone services, or other communication services if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 (47 U.S.C. 701), or(D) transportation of gas or steam by pipeline,if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof.

Contrast Section 163(j)(7) with Section 168(i)(10) TCJA description of utility trade or business


Regulation Section 1.167(l)-(1)(b)Public utility property

Public utility property (1) In general.—Under section 167(l)(3)(A), property is "public utility property" during any period in which it is used predominantly in a "section 167(l) public utility activity." The term "section 167(l) public utility activity" means the trade or business of the furnishing or sale of—

(i) Electrical energy, water, or sewage disposal services,(ii) Gas or steam through a local distribution system,(iii) Telephone services,(iv) Other communication services (whether or not telephone services) if furnished or sold by the Communications Satellite Corporation for purposes authorized by the Communications Satellite Act of 1962 (47 U.S.C. 701), or(v) Transportation of gas or steam by pipeline,

if the rates for such furnishing or sale, as the case may be, are regulated, i.e., have been established or approved by a regulatory body described in section 167(l)(3)(A). The term "regulatory body described in section 167(l)(3)(A)" means a State (including the District of Columbia) or political subdivision thereof, any agency or instrumentality of the United States,or a public service or public utility commission or other body of any State or political subdivision thereof similar to such a commission. The term "established or approved" includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates, even though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by the taxpayer involved.


Section 7701(a)(33)Regulated public utility

Regulated public utility

The term “regulated public utility” means:

A. A corporation engaged in the furnishing or sale of —

i. electric energy, gas, water, or sewerage disposal services, or

ii. transportation (not included in subparagraph (C)) on anintrastate, suburban, municipal, or interurban electric railroad, on an intrastate, municipal, or suburban trackless trolley system, or on a municipal or suburban bus system, or

iii. transportation (not included in clause (ii)) by motor vehicle —

if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, by a public service or public utility commission or other similar body of the District of Columbia or of any State or political subdivision thereof, or by a foreign country or an agency or instrumentality or political subdivision thereof.


Section 7701(a)(33) (cont’d)Regulated public utility

B. A corporation engaged as a common carrier in the furnishing or sale of transportation of gas by pipeline, if subject to the jurisdiction of the Federal Energy Regulatory Commission.

C. A corporation engaged as a common carrier… transportation by railroad, if subject to the jurisdiction of the Surface Transportation Board, or… transportation of oil or other petroleum products… by pipe line, if subject to …[FERC] or if the rates for such furnishing or sale are subject to the jurisdiction of a public service or public utility commission or other similar body of the District of Columbia or of any State.

D. …telephone or telegraph service, if the rates….

E. …common carrier by air, subject to the jurisdiction of the Secretary of Transportation.

F. …transportation by a water carrier….

G. A rail carrier…

H. A common parent corporation which as a common carrier by railroad…


Section 7701(a)(33) (cont’d)Regulated public utility

• The term “regulated public utility” does not (except as provided in subparagraphs (G) and (H)) include a corporation described in subparagraphs (A) through (F), inclusive, unless 80 percent or more of its gross income (computed without regard to dividends and capital gains and losses) for the taxable year is derived from sources described in subparagraphs (A) through (F), inclusive.

• If the taxpayer establishes to the satisfaction of the Secretary that

i. its revenue from regulated rates described in subparagraph (A) or (D)and its revenue derived from unregulated rates are derived from theoperation of a single interconnected and coordinated system or from theoperation of more than one such system, and

ii. the unregulated rates have been and are substantially as favorable tousers and consumers as are the regulated rates,

then such revenue from such unregulated rates shall be considered, for purposes of the preceding sentence, as income derived from sources described in subparagraph (A) or (D).


Bonus depreciation and interest deduction limitation transition issuesScope of regulated public utility exceptions

• Trade or business v. entity v. asset

−Is a power plant that does not constitute “public utility property” for normalization purposes owned by a regulated, vertically-integrated utility part of a rate-regulated utility trade or business?

• Whether “rates . . . established or approved” has the same meaning in Section 163(j)(7) as it does for normalization purposes

−Significance of “public utility property” definitions under Section 167 and Section 46 regulations and private letter rulings

◦ PLRs 201544018, 201619005, 201718017, 201722006, 201825025 and 201825026


Bonus depreciation and interest deduction limitationScope of regulated public utility exceptions – examples

• Power generation facility that sells all its output under a long-term power purchase agreement negotiated with a customer that is not a regulated public utility, but requires one-time permission from the Federal Energy Regulatory Commission (“FERC”) to enter the contract

• Power generation facility that sells all its output under a long-term power purchase agreement negotiated with customer that is a regulated public utility, with the utility customer reselling the power to its customers at prices set by its public utility commission

• Power generation facility that sells all its output on wholesale markets without a long-term power purchase agreement, but requires one-time permission from the FERC to conduct business in such a manner

• Interstate pipelines that compute a price based on traditional ratemaking principles, but with permission from the FERC, may and do negotiate market (discounted) rates with individual shippers (i.e., the price determined under cost-of-service, rate-of-return regulation serves as a “cap” and is not charged for some, most or all the transmission services provided)


Bonus depreciation


Depreciation systems since 1986*

• 1986-2018 — Modified accelerated cost recovery system

−2001-2004 — 30/50 percent bonus depreciation

−2008-2017 — 50 percent bonus depreciation

◦ 2010-2011 — 100 percent bonus depreciation

−After September 27, 2017

* Reflects the general rules, not the transitional guidance under each depreciation system

◦ Rate-regulated utilities

−50%-40%-30% phase-down for property acquired before September 28, 2017, and placed in service in 2017-2020

−100% expensing for property acquired after September 27, 2017, and placed in service in a tax year beginning before January 1, 2018

◦ Other taxpayers

−100% expensing through 2022 with phase-downs through 2026 (generally)

−80%-60%-40%-20% phase-down for additions through 2026


Anticipated guidanceTCJA bonus depreciation

• Whether 100% expensing is available to utilities for property acquired after September 27, 2017, and placed in service before January 1, 2018

• Whether the election to apply pre-TCJA rules for tax years including September 27, 2017, is available to utilities

• How to apply the effective date of TCJA Section 13201(h) to self-constructed property

• How to apply any TCJA effective date rules to a component of larger self-constructed property

• Definition or examples of a component of larger self-constructed property

• Whether taxpayers may rely on the proposed regulations for 2017 tax returns

• Scope of a Section 163(j)(7)(A)(iv) regulated utility trade or business


Rate-regulated utilitiesQualified property

• Preamble to proposed regulations

−The proposed regulations provide that qualified property does not include . . . (6) property described in section 168(k)(9)(A) or (B).

−Section 168(k)(9) provides that qualified property does not include (A) any property that is primarily used in a trade or business described in section 163(j)(7)(A)(iv) . . .

−Section 163(j) applies to taxable years beginning after December 31, 2017 – TCJA Section 13301(c)

−Accordingly, the exclusion of property described in section 168(k)(9) from the additional first year depreciation deduction applies to property placed in service in any taxable year beginning after December 31, 2017.

• Prop. Reg. Sec. 1.168(k)-2

−Additional first year depreciation deduction allowable under section 168(k) for qualified property acquired and placed in service after September 27, 2017 – Prop. Reg. Sec. 1.168(k)-2(a)(1)

−Property not eligible for additional first year depreciation deduction includes depreciable property described in section 168(k)(9)(A) and placed in service in any taxable year beginning after December 31, 2017 – Prop. Reg. Sec. 1.168(k)-2(b)(2)(ii)


Regulated utilitiesMACRS and bonus depreciation elections for 2017

• Election out of bonus depreciation – Section 168(k)(7)

• In the case of qualified property placed in service by the taxpayer during the first taxable year ending after September 27, 2017, if the taxpayer elects to have this paragraph apply for such taxable year, paragraphs (1)(A) and (5)(A)(i) shall be applied by substituting "50 percent" for "the applicable percentage“ – Section 168(k)(10)−A taxpayer may make an election to deduct 50 percent, instead of 100 percent, additional first year depreciation for all

qualified property acquired after September 27, 2017, by the taxpayer and placed in service by the taxpayer during its taxable year that includes September 28, 2017 – Prop. Reg. Sec. 1.168(k)-2(e)(3)

−Because section 168(k)(10) does not state that the election may be made “with respect to any class of property” as stated in section 168(k)(7) for making the election out of the additional first year depreciation deduction, the proposed regulations provide that the election under section 168(k)(10) applies to all qualified property

−The election is made separately by each person owning qualified property (for example, for each member of a consolidated group by the common parent of the group, by the partnership, or by the S corporation)

−Applies to all qualified property (not by class of property)

• Election to 150 percent declining balance depreciation – Section 168(b)(2)(C)

• Election to use straight-line depreciation – Section 168(b)(3)(D)

• Election to use ADS depreciation – Section 168(g)(7)


TCJA Section 13201(h)TCJA bonus depreciation effective date

(h) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided by paragraph (2), the amendments made by this section shall apply to property which—

(A) is acquired after September 27, 2017, and

(B) is placed in service after such date.

For purposes of the preceding sentence, property shall not be treated as acquired after the date on which a written binding contract is entered into for such acquisition.

(2) SPECIFIED PLANTS.—The amendments made by this section shall apply to specified plants planted or grafted after September 27, 2017.


Pre-TCJA bonus depreciation

• Codified acquisition date requirement until the Protecting Americans from Tax Hikes Act of 2015

• Reg. Sec. 1.168(k)-1(b)(4)

−Acquired property

−Self-constructed property

◦ Property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract . . . that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in its trade or business (or for its production of income) is considered to be manufactured, constructed, or produced by the taxpayer. −PLRs 201210004, 201214003 and 201313012

◦ Components of larger self-constructed property

Post-TCJA bonus depreciation

• Non-codified acquisition date in TCJA Section 13201(h) effective date provision

• Prop. Reg. Sec. 1.168(k)-2(b)(5)

−Acquired property

◦ This paragraph (b)(5)(iv) does not apply to property that is manufactured, constructed, or produced for the taxpayer by another person under a written binding contract that is entered into prior to the manufacture, construction, or production of the property . . .

−Self-constructed property

◦ Components of larger self-constructed property

Acquisition date requirementBonus depreciation effective dates


Pre-TCJA bonus depreciation

• Pre-PATH statutory rules for self-constructed property applicable to December 31, 2007, and January 1, 2014

• Reg. Sec. 1.168(k)-1(b)(4)(ii)(E) and (iii)(C)(1)

−Components acquired (or for which construction began) before the applicable date, but construction of the larger self-constructed property began after the applicable date

−Construction of larger self-constructed property began before the applicable date but components acquired (or construction of components began) after the applicable date.

• Component examples included turbines and power plants

• Rev. Proc. 2011-26

Post-TCJA bonus depreciation

• Statutory rules for self-constructed property applicable to January 1, 2027

• Prop. Reg. Sec. 1.168(k)-1(b)(5)(iii)(F) and (iv)(C)

−Components acquired (or for which construction began) before the applicable date, but construction of the larger self-constructed property began after the applicable date

−Construction of larger self-constructed property began before the applicable date but components acquired (or construction of components began) after the applicable date.

• Fewer component examples

Self-constructed propertyBonus depreciation


Bonus depreciation example (not longer production period property)

Construction work in progress balance

9/27/2017 12/31/2017

Placed into service

• Tax analysis

−Identification of components and written binding contracts

−Costing of materials and supplies, construction work in progress, off-site construction of components

−The unadjusted depreciable basis of the larger self-constructed property that is eligible for the additional first year depreciation deduction, assuming all other requirements are met, must not include the unadjusted depreciable basis of any component that does not satisfy the requirements

−Coordination with Section 45 begun construction rules

Materials and supplies on

handContract to acquire

asset or components

Construction is completed


Longer production period property (LPPP) under former (pre-TCJA) Section 168(k)(6) Bonus depreciation prior to the TCJA

• Key criteria from the definition of longer production period property

−Recovery period of at least 10 years or transportation property,

−Subject to Section 263A, and

−Interest capitalization criteria

◦ Estimated production period > 2 years OR

◦ Estimated production period > 1 year AND cost > $1 million

• Placed in service Recovery percentage2018 40 percent (general rule), no special rule for LPPP2019 30 percent (general rule), 40 percent for LPPP to the extent of the adjusted

basis thereof attributable to manufacture, construction, or production before January 1, 2019

2020 No bonus depreciation (general rule), 30 percent for LPPP to the extent of the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020


Transition rules — LPPP with pre-9/28/17 construction as amended by the TCJABonus depreciation

• TCJA amendment – Section 168(k)(8) phase-down applies to qualified property acquired by the taxpayer beforeSeptember 28, 2017, and placed in service by the taxpayer after September 27, 2017

• Act Section 13201(h) applies to property acquired after September 27, 2017, and placed in service after such date

Placed in service Recovery percentage

2018 50 percent

2019 40 percent


• Section 168(k)(6) as in effect on the day before TCJA


2018 40 percent (general rule), no special rule for LPPP2019 40 percent for LPPP to the extent of the adjusted basis thereof attributable

to manufacture, construction, or production before January 1, 20192020 No bonus depreciation (general rule), 30 percent for LPPP to the extent of

the adjusted basis thereof attributable to manufacture, construction, or production before January 1, 2020


Transition rules — LPPP with pre-9/28/17 construction as amended by the TTCA of 2018Bonus depreciation

• TCJA amendment – Section 168(k)(8) phase-down applies to qualified property acquired by the taxpayer beforeSeptember 28, 2017, and placed in service by the taxpayer after September 27, 2017

• Act Section 13201(h) applies to property acquired after September 27, 2017, and placed in service after such date


2018 50 percent

2019 40 percent


• Tax Technical Corrections Act of 2018 amendment to Section 168(k)(6) as in effect on the day before TCJA


2018 50 percent

2019 40 percent



Bonus depreciation example (longer production period property)

Taxpayer enters written binding contract and then contractor

begins physical work of a significant nature

9/27/2017 12/31/2017 12/31/2018 12/31/2019

Delivery, acceptance and title transfer

Payments made pursuant to construction contract

Contractor continues

construction

Placed into service

• Tax analysis

−How does the TCJA effective date apply to self-constructed property to be owned by a utility and placed in service in 2018?

−Characterization of the property produced by the contractor as self-constructed or acquired

−Components of larger self-constructed property

−10 percent safe harbor for determining when construction begins and economic performance analysis


Rules affecting partnerships – consideration of eligibility of used propertyProposed bonus depreciation regulations

• Property placed in service and contributed to a partnership in the same taxable year

−If qualified property is transferred in a Section 721(a) transaction to a partnership that has as a partner a person, other than the transferor of property, who previously had a depreciable interest in the qualified property, in the same taxable year that the qualified property is placed into service by the partnership, the allowable additional first year depreciation deduction is allocated entirely to the transferor, prior to the Section 721(a) transaction, and not to the partnership

◦ Includes transactions described by Rev. Rul. 99-5, Situation 1

• Property placed in service and disposed in the same taxable year, including technical terminations

• Amounts not eligible for Section 168(k) deduction

−Section 704(b) book basis of zero tax basis partnership property

−Section 704(b) book basis of property subject to the remedial Section 704(c) method (both contributed and revalued partnership property)

−Basis adjustments under Section 732 (distributed property)

−Basis adjustments under 734(b) (transferred property – new or existing partners)


Rules affecting partnerships – consideration of eligibility of used property (continued)Proposed bonus depreciation regulations

• A new or existing partner’s basis adjustment under Section 743(b) may satisfy the requirements of Section 168(k) for certain transfers of partnership interests after September 27, 2017

−The partner acquiring an interest in the partnership must not be related to the transferor of the partnership interest

−The transfer must be one in which gain or loss could be recognized and

−The partner acquiring the interest (and its predecessors in interest, if any) must not have previously had any depreciable interest in the portion of the property deemed acquired to which the Section 743(b) adjustment is allocated

• Increases to the basis of partnership qualified property under Section 743(b)

−Aggregate view providing that each partner is treated as having a depreciable interest in the partner’s proportionate share of partnership property for purposes of determining whether a Section 743(b) basis adjustment qualifies for Section 168(k)

−A partnership may elect not to deduct the additional first year depreciation for an increase in the basis of qualified property under Section 743(b) even if the partnership does not make such an election with respect to the partnership’s other qualified property in the same class and vice versa


Extenders


Significant provisions affecting renewable energyBipartisan Budget Act

•Extensions of energy credits

−A one-year extension of the section 25C nonbusiness energy property credit

−A five-year extension of the section 25D residential energy efficient property credit

−A one-year extension of the section 45 production tax credit (“PTC”)

−A one-year extension of the section 45L new energy efficient home credit

−A five-year extension of the section 48 energy investment tax credit (“ITC”)

−A modification of the section 45J credit for production from advanced nuclear power facilities

−A one-year extension of the section 30B alternative motor vehicle credit

−A one-year extension of the section 30C alternative fuel vehicle refueling property credit

−A one-year extension of the section 30D new qualified plug-in electric drive motor vehicles credit

−An extension and enhancement of the section 45Q carbon dioxide sequestration credit


Production tax credit and investment tax credit in lieu of production tax credit

Qualified Resources/FacilitiesPTC Amount

for 2018Construction Beginning…

Phase-out (PTC Amount)

Phase-out(ITC Election)

Wind 2.4 cents/kwh

Before 1/1/2017 100% 30%Calendar 2017 80% 24%Calendar 2018 60% 18%Calendar 2019 40% 12%

Geothermal 2.4 cents/kwh Before 1/1/2018 None 30%

Closed-loop biomass 2.4 cents/kwh Before 1/1/2018 None 30%

Open-loop biomass 1.2 cent/kwh Before 1/1/2018 None 30%

Municipal solid waste (landfill gas, trash)

1.2 cent/kwh Before 1/1/2018 None 30%

Hydropower 1.2 cent/kwh Before 1/1/2018 None 30%

Marine and hydrokinetic renewables (including small irrigation power)

1.2 cent/kwh Before 1/1/2018 None 30%


Commercial ITC – section 48

Qualified Resources/Facilities ITC Rate Begun Construction Statutory Deadline

Solar

30% Before 1/1/202026% Calendar 202022% Calendar 202110% Calendar 2022 or placed in service after 12/31/2023

Fuel cell

30% Before 1/1/202026% Calendar 202022% Calendar 2021

0% After calendar 2021 or placed in service after 12/31/2023

Stationary microturbine 10% Before 1/1/2022Geothermal 10% Placed in service before 1/1/2017

Small wind

30% Before 1/1/202026% Calendar 202022% Calendar 2021

0% After calendar 2021 or placed in service after 12/31/2023

Combined heat/power 10% Before 1/1/2022Thermal 10% Before 1/1/2022


Contributions in aid of construction


Evolution of statuteSection 118

• Section 118 originated in the 1954 Internal Revenue Code• Tax Reform Act of 1976 added former section 118(b)

−Effective for contributions after January 31, 1976−Treated CIAC (excluding customer connection fees) made to regulated water and sewage disposal utilities as nontaxable

• Revenue Act of 1978−Legislation was effective retroactively to January 31, 1976−Extended CIAC exclusion made to regulated public gas and electric utilities providing electric energy, gas and steam

• Tax Reform Act of 1986−Repealed Section 118(b) as it then existed making utility CIAC taxable

• Small Business Job Protection Act 1996−Added Section 118(c) to provide that excludable contribution to capital includes CIAC for regulated water and sewage disposal utilities operating in corporate form and providing services to the general public

• Tax Cuts and Jobs Act (2017)


Summary of statuteSections 61 and 118

• Section 61(a) — gross income means all income from whatever source derived, unless excluded by law

• Section 118(a) — exclusion from gross income for any contribution to the capital of a corporate taxpayer

• Prior to the Tax Cuts and Jobs Act

−Section 118(b) — exception from the term “contribution to the capital of the taxpayer” for any contribution in aid of construction from a customer or potential customer

−Section 118(c) — the term “contribution to the capital of the taxpayer” includes contributions in aid of construction received by water and sewer utilities

• After the Tax Cuts and Jobs Act

−Section 118(b) — amended to expand the exception from the term “contribution to the capital of the taxpayer”

◦ Any contribution in aid of construction or any other contribution as a customer or potential customer

◦ Any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such)

−Section 118(c) — stricken


Other provisions affecting regulated utilitiesTax Cuts and Jobs Act

• Non-shareholder contributions to capital v. contributions in aid of construction

−Section 118(a) general rule continues

◦ In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer

−Repeal of exclusions for certain contributions made after December 22, 2017

◦ Water utilities

◦ Amounts from governmental entities or civic groups

−No impact on tax treatment of reimbursements or in-kind transfers addressed in IRS Notice 2016-36


Tax Cuts and Jobs Act effective dateSection 118 amendments

Enactment date

Execute construction

contract

Receive amount

charged for construction

Begin construction

Place asset into service

•Effective date per House bill – The amendments made by this section shall apply to contributions made, and transactions entered into, after the date of the enactment of this Act.

•Effective date per TCJA Section 13312(b)

−Generally applies to contributions made after the date of enactment

−Exception for any contribution made after the date of enactment by a governmental entity, which is made pursuant to a master development plan that has been approved prior to enactment date by a governmental entity

•Tax indemnification and gross-up language in contracts involving reimbursements

Receive amount

charged for construction

Effective date


Transition issuesTCJA amendments to Section 118

• Identifying master development plans

•Tax indemnification and gross-up language in contracts involving reimbursements

•Determining which tax depreciation rules would apply to the contributed/reimbursed property if the transaction is taxable


Tax gross-up factors Reimbursements for construction costs

• Customer requests an extension of a line and will reimburse the utility for the $100,000 of construction costs

• How much should the utility charge to be made whole?

−Assumptions

◦ The receipt is taxable for federal and state tax purposes

◦ The composite tax rate is 25 percent

◦ The new asset is depreciable for tax purposes over 20 years

−Alternatives

◦ $100,000?

◦ $133,333 (to cover upfront tax costs)?

◦ $115,000 (to cover upfront tax costs but acknowledge the additional tax depreciation deduction to be realized over 20 years)?


Impact of the Tax Cuts and Jobs ActTax gross-up of CIACs

*Transmission provider’s composite federal and state tax rates at the time payments or property transfers are received and subject to highest marginal rates at that time

**Transmission provider’s current weighted cost of capital

Decrease in tax rate would decrease tax

gross-up

Loss of bonus depreciation would

increase tax gross-up

Decrease in tax rate would decrease tax

gross-up

Tax gross-up =

Current tax rate* x (gross income – PV** of tax depreciation)1 – current tax rate


Tax issuesStandard interconnection agreements

• Does the tax section of the interconnection agreement, including the tax representations, reflect Notice 2016-36 or the IRS notices that is supersedes?

• Does the agreement reflect an intent to classify the reimbursement or property transfer as a non-shareholder contribution to capital or as an excludable refundable advance under Rev. Proc. 2005-35?

• Does the agreement address the potential tax consequences of retention of the interconnection facilities by the transmission company at the end of the power purchase agreement?

• If the facility is a storage facility without generation, is the wording of the agreement appropriate?

• Notice 2016-36 uncertainties

−Distribution-only interconnections

◦ PLR 201813016

◦ PLR 201619007

−Interconnections of energy storage facilities

◦ How to apply the five percent test


Rev. Proc. 2018-31Section 118 method changes

• Designated automatic accounting method change 129

−Payments or property received that do not constitute contributions to the capital of the taxpayer within the meaning of Section 118 and the regulations thereunder, from excluding the payments or the fair market value of the property from gross income as nontaxable contributions to capital under Section118 to including the payments or the fair market value of the property in gross income under Section 61

• Designated automatic accounting method change 226

−Initial transfer of intertie — Section 481(a) adjustment

−Termination of safe harbor — cut-off method


Termination of safe harbor upon termination of power purchase agreementInterconnections between electric generators and transmission utilities

• Notice 2016-36 — Upon the termination of a power purchase contract between a generator and a utility, if the utility obtains or retains ownership (for tax purposes) of the intertie, the generator will be deemed to have transferred the intertie to the utility as of the first day of such termination. Such a deemed transfer will not be treated as a CIAC, except in circumstances that indicate an intention by the parties to characterize a contribution of an intertie as a transaction that in substance constitutes a CIAC.

• Notice 2001-82 — Upon the termination of the power purchase contract between a Qualifying Facility and a utility, if the utility obtains or retains ownership (for tax purposes) of property transferred in a QF transfer, the Qualified Facility will bedeemed to have made a transfer to the utility which constitutes a CIAC under section 118(b) as of the first day of such termination.

• Notice 90-60 — Upon the termination of the power purchase contract between a Qualifying Facility and a utility, if the utility obtains or retains ownership (for tax purposes) of property transferred in a QF transfer, the Qualified Facility will be deemed to have made a transfer to the utility as of the first day of such termination. Such a deemed transfer will not be treated asa CIAC, except where circumstances indicate an intention by the parties to characterize as a QF transfer a transaction that in substance constitutes a CIAC. The utility shall include in income the fair market value of the property deemed transferredless the amount, if any, paid by the utility to obtain or retain ownership of the property for tax purposes. Therefore, if the amount paid by the utility is fair market value, no amount will be includible in income by the utility. The amount paid by the utility shall include any “extension allowance” or similar payment by the utility to the Qualifying Facility during the term of the power purchase contract. For this purpose, an extension allowance is a payment to compensate the Qualifying Facility in consideration of the anticipated use of the property by the utility to deliver power to customers other than the Qualifying Facility.


Base erosion and anti-abuse tax


Impact on investors in renewable energy facilitiesRecent federal income tax legislation

Base Erosion Anti-Abuse Tax (“BEAT”):

• Generally applies to corporations with:

(1) average annual gross receipts for the 3-year period ending with the preceding taxable year are at least $500 million, and

(2) payments to foreign related persons that exceed 3% of total deductions (2% for groups that include a bank or securities dealer)

• Imposes tax equal to the “base erosion minimum tax amount” calculated as:

(1) 10% of “modified taxable income” (MTI) over

(2) regular tax liability reduced by all tax credits other than the R&D credit and 80% of the lesser of (a) ITC, PTC and low income housing credit or (b) the base erosion minimum tax amount.

• MTI generally means taxable income less deductions claimed for payments made to foreign related persons

• After 2025, regular tax liability is reduced by all tax credits (e.g., PTC/ITC)

• The 10% of MTI amount is 5% for 2018 and 12.5% after 2025

− The 5%, 10% and 12.5% amounts are increased to 6%, 11% and 13.5%, respectively, for affiliated groups that include a bank or securities dealer

• Impact and potential for legislative fix?


Example of use of GBCs against the BEAT

Example 1.--Taxpayer has TI of 10,000, modified TI of 21,000, and no GBCs. Regular tax BEAT Taxable income 10,000 10,000 Base erosion payments -- 11,000 Modified taxable income 10,000 21,000 Rate .21 .10 Tax 2,100 2,100 Taxpayer is not subject to the BEAT, and pays tax of 2,100.


Example of use of GBCs against the BEAT

Example 2.-- Taxpayer has TI of 10,000, modified TI of 21,000, and 2,000 of energy credits. Regular tax BEAT Modified taxable income 10,000 21,000 Rate .21 .10 Tentative tax 2,100 2,100 Credits (1,575) (1,260) (1,575 x .80)** Tax 525 840 Taxpayer is subject to the BEAT by virtue of having GBCs, and pays tax of 840 (525 regular tax plus 315 BEAT). The Taxpayer’s GBC carryforward is 425 (2,000 – 1,575), despite having the benefit of the use of only 1,260 of credits to offset tax liability. On a dollar-for-dollar basis the value of the 315 of “haircutted” GBCs are permanently lost unless revived as a carryforward against future years’ tax liability. **also, (2,100 – 525) x .80


Qualified opportunity zones


Three types of potential benefits for program participantsOpportunity zones

Deferral of gain from a sale or exchange of prior investments:Taxpayers may elect to temporarily defer from inclusion in gross income certain gains from the sale or exchange of an asset to the extent of the aggregate amount invested in a QOF during the 180-day period beginning on the date of the sale or exchange. The deferral lasts until the earlier of the sale or exchange of the QOF investment or December 31, 2026.

Reduction of deferred gain from the sale or exchange of prior investments: After holding investments in QOFs for a specified period of time, taxpayers may receive a permanent reduction of the deferred gain originally realized equal to 10 percent (if QOF is held at least five years) or 15 percent (if QOF is held at least seven years) through a partial basis step-up (see examples below).

Exclusion of gain from the sale or exchange of investments in QOFs: After holding investments in QOFs for a period of at least ten years, taxpayers may elect to receive a permanent exclusion of the appreciation of the QOF investment through a full basis step-up to the fair market value of the QOF investment on the date such investment is sold or exchanged.


Examples of qualified opportunity zone benefitsOpportunity zones

Investor keeps capital gains proceeds invested in the qualified opportunity fund for 5 years• Investor re-invests $10,000 of gain proceeds into a QOF in 2018 within 180 days of disposition.• QOF investment is held for 5 years, and sold in 2023 for $15,000.• Basis in the QOF will be increased by an amount equal to 10% of the deferred gain, or $1,000.

• Upon disposition in 2023, Investor recognizes both:• $9,000 of deferred gain net of $1,000 partial basis step-up, and• 5,000 of gain determined with respect to the appreciation of the

QOF investment.• $14,000 total gain



Investor keeps capital gains proceeds invested in the qualified opportunity fund for 7 years• Same as above except QOF investment is held for 7 years, and sold in 2025 for $17,000.• Basis in the QOF will be increased by an amount equal to 15% of the deferred gain, or $1,500.• Upon disposition in 2025, Investor recognizes both:

• $8,500 of deferred gain net of $1,000 partial basis step-up, and• 7,000 of gain determined with respect to the appreciation of the

QOF investment.• $15,500 total gain



Investor keeps capital gains proceeds invested in the qualified opportunity fund for 10 years• Same as above except QOF investment is held for 10 years, and sold in 2028 for $20,000.• Basis in the QOF will be increased by an amount equal to 15% of the deferred gain, or $1,500.• Upon disposition in 2028, Investor recognizes:

• $8,500 of deferred gain net of $1,000 partial basis step-up on December 31, 2026, and

• -0- gain excluded from taxation with respect to the appreciation of the QOF investment.

• $8,500 total gain


Available guidanceOpportunity zones

• The statute (IRC sections 1400Z-1 and 1400Z-2)

• Legislative History

• IRS FAQ (not included in IRB and cannot be relied upon as legal authority)

• Notice 2018-48 (published in the IRB on July 9, 2018)

• IRC section 1400Z-2(e)(4) – The Secretary shall prescribe regulations as may be necessary to carry out the purposes of this section including –

− (A) rules for the certification of qualified opportunity funds for the purposes of this section,

− (B) rules to ensure a qualified opportunity fund has a reasonable period of time to reinvest the return of capital from investments in qualified opportunity zone stock and qualified opportunity zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified opportunity zone property, and

− (C) rules to prevent abuse.


Available guidance - continuedOpportunity zones

• First regulation project expected to be temporary and proposed regulations regarding how to make the exclusion election under IRC section 1400Z-2(a)(2).

− Should clarify certain aspects regarding the application of the 180-day rule (i.e., election may be made on amended 2017 tax return).

− Should clarify the extent of the exclusion regarding its application against all gains or only those gains characterized as capital gain for federal income tax purposes.

− Should clarify whether the same taxpayer that triggers the gain is required to make the election to defer gain or whether this can be determined at the individual investor level on a taxpayer by taxpayer basis.


ImplementationOpportunity zones

Step 1 – Form a Qualified Opportunity Fund (QOF)

• An investment vehicle taxed as a corporation, partnership, or S-corporation.

• Organized for the purpose of investing in QOZ Property.

Step 2 – Taxpayer(s) invests amounts “matched” to gains from recent sales or exchanges of property

• Capital gains realized from one or more sales or exchanges of property within 180 days from the date of investment in the QOF qualifies for tax-favored treatment-

− Gain deferral / up to 15% exclusion (election must be made by the taxpayer making the QOF investment); and

− Basis step-up upon sale or exchange of QOF investment (election must be made by the taxpayer selling or exchanging QOF investment).

• Additional non-tax-favored contributions may be made to QOF but those investments are treated as a separate investment and not eligible for basis step-up election upon sale or exchange of QOF investment.


Implementation - continuedOpportunity zones

Step 3 – QOF uses proceeds to acquire Qualified Opportunity Zone Property (QOZ Property)

1.Qualified Opportunity Zone Stock

2.Qualified Opportunity Zone Partnership Interests

3.Qualified Opportunity Zone Business Property


Step 4 – QOF must pass 90% asset test on measuring dates

QOF must hold at least 90 percent of its assets in QOZ Property as determined by the average of the percentage of QOZ Property held in the fund as measured on the last day of the first 6-month period of the taxable year of the fund, and on the last day of the taxable year of the fund.

Step 5 – QOF that holds Qualified Opportunity Zone Partnership Interests and/or Qualified Opportunity Zone Stock must satisfy definition of QOZB on measuring dates

A determination must be made annually whether the partnership interests and/or corporation stock held by the QOF satisfy the definition of a Qualified Opportunity Zone Partnership Interest and/or Qualified Opportunity Zone Stock. To satisfy this requirement a semi-annual determination must be made (on applicable testing dates) based on the tax balance sheet of the partnership and/or corporation to determine whether the entity satisfies the definition of a Qualified Opportunity Zone Business (QOZB).

Implementation - continuedOpportunity zones


Qualified opportunity zone business propertyOpportunity zones

Tangible property used in a trade or business of the QOF, if:

1. Such property was acquired by purchase (as defined in IRC 179(d)(2) after December 31, 2017;

2. The original use of such property in the qualified opportunity zone commences with the QOF or the QOF substantially improves the property; and

3. During substantially all of the QOF’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.

Acquired from Unrelated Person. To be considered tangible property acquired by the QOF by purchase after December 31, 2017, such property must be acquired from a seller that is unrelated to the QOF at the time of acquisition. The seller will be treated as unrelated provided the seller owns directly or indirectly a 20% or less capital or profits interest (or value/control 20% or less interest) in the QOF. See IRC 707(b)(1) and IRC 267(b).


Qualified opportunity zone business property - continuedOpportunity zones

Original Use. First use to which the property is put in the QOZ. See special rule under IRC 1394 with regard to property that has been vacant for the preceding 12 months.

Substantially Improved. Property shall be treated as substantially improved by the QOF only if, during any 30 month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the QOF exceed the amount equal to the adjusted basis of such property at the beginning of such 30 month period.

Substantially All Use in QOZ During Holding Period. Substantially all is not defined. This term is defined as being at least 85% in the NMTC regulations and could be interpreted to mean 90% or more in order to be consistent with the 90% asset test.


Qualified opportunity zone partnership interestOpportunity zones

Any capital or profits interest in a domestic partnership, if:

1. Such interest is acquired by QOF after December 31, 2017 from the partnership solely in exchange for cash;

2. As of the time such interest was acquired, such partnership was a qualified opportunity zone business (QOZB) or, in the case of a new partnership, such partnership was being organized for the purposes of being a QOZB; and

3. During substantially all of the QOF’s holding period for such interest, such partnership qualified as a QOZB.

QOZB Determination. When a QOF acquires a partnership interest (any capital or profits interest in a partnership) rather than directly engaging in a trade or business, the 90% asset holding test essentially shifts from measuring the assets held by the QOF to the assets held by the partnership to determine whether the partnership interest will be respected as QOZ Property. The partnership must be determined to satisfy the definition of a QOZB at the time the partnership is acquired (or at the time organized for the purpose of being a QOZB), and for substantially all the QOF holding period of such interest.


Qualified opportunity zone stockOpportunity zones

Any stock in a domestic corporation, if:

1. Such stock is acquired by QOF after December 31, 2017, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash;

2. As of the time such stock was issued, such corporation was a qualified opportunity zone business (QOZB) or, in the case of a new corporation, such corporation was being organized for the purposes of being a QOZB; and

3. During substantially all of the QOF’s holding period for such stock, such corporation qualified as a QOZB.


Qualified opportunity zone stock - continuedOpportunity zones

Restrictions of Certain Purchases by Corporation of its Own Stock. A rule similar to the rule of IRC 1202(c)(3) shall apply.

• Redemptions from QOF or Related Person. Stock acquired by the QOF shall not be treated as QOZ Stock if, at any time during the 4-year period beginning on the date 2 years before the issuance of such stock, the corporation issuing such stock purchased (directly or indirectly) any of its stock from the QOF or from a person related to the QOF (within the meaning of IRC 267(b) or 707(b)).

• Significant Redemptions. Stock issued by a corporation shall not be treated as QOZ Stock if, during the 2-year period beginning on the date 1 year before the issuance of such stock, such corporation made 1 or more purchases of its stock with an aggregate value (as of the time of the respective purchases) exceeding 5% of the aggregate value of all of its stock as of the beginning of such 2-year period.

• Treatment of Certain Transactions. If any transaction is treated under IRC 304(a) as a distribution in redemption of the stock of any corporation, for purposes of the restrictions above, such corporation shall be treated as purchasing an amount of its stock equal to the amount treated as such a distribution under IRC 304(a).


Qualified opportunity zone businessOpportunity zones

A trade or business:

• In which substantially all of the tangible property owned or leased by the taxpayer (partnership or corporation) is qualified opportunity zone business property, meaning each of the following requirements are satisfied;◦ Tangible property owned or leased by the QOZB, if:

− such property was acquired by purchase after December 31, 2017;− the original use of such property in the QOZ commences with the QOZB

or the QOZB substantially improves the property; and− during substantially all of the QOZB’s holding period for such property,

substantially all of the use of such property was in the QOZ.• At least 50% of the total gross income of such entity is derived from the

active conduct of such any business in the QOZ;• A substantial portion of the intangible property of such entity is used in

the active conduct of any such business in the QOZ;• Less than 5% of the average of the aggregate unadjusted bases of the

property held by such entity is attributable to nonqualified financial property; and

• The trade or business is NOT engaged in certain “sin” businesses including a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store that primarily sells alcohol for consumption off premises.


Benefit ExampleOpportunity Zones

Investor keeps capital gains invested in the Opportunity Fund for a specified number of years.

• Investor re-invests $10,000 of capital gains into an Opportunity Fund in 2018.

*Any additional appreciation on the Fund investment will also be capital gain included in taxable income.

**When the QOF investment is sold or exchanged after 10 years of being invested in the opportunity fund, the basis of the QOF investment shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged. Thus, any appreciation on the Fund investment will NOT be included in taxable income.

Example 1 Example 2 Example 3

QOZ Fund Reinvestment Amount 10,000 10,000 10,000Number of Years Held 5 Years 7 Years 10 YearsYear Investment Sold 2023 2025 2028Basis Step Up 10% 15% 15%Deferred Gain 1,000 1,500 1,500

Capital Gain Included in Taxable Income Upon Recognition 9,000 8,500 8,500Date of Deferred Gain Recognition 12/31/2023* 12/31/2025* 12/31/2026**


Considerations – continuedOpportunity zones

Related party rules will need to be analyzed with investments in qualifying businesses.

The acquisition by purchase after December 31, 2017 is probably the biggest restriction when determining whether property “counts” as qualified opportunity zone business property.

It is anticipated the opportunity zone benefits will be able to pair with the Low-Income Housing Credit, New Markets Tax Credit, Investment Tax Credit, Production Tax Credit, and other incentive opportunities for both Federal and State.

Important Dates

• December 31, 2017 – qualified stock, partnership interest, or business property must be acquired after this date

• December 31, 2019 – latest date to invest for 7-year, 15% gain exclusion

• December 31, 2021 – latest date to invest for 5-year, 10% gain exclusion

• December 31, 2026 – required recognition of capital gains on original investment


Renewable energy applicationsOpportunity zones

• Sponsor Equity

− Invest through “captive” QOF and hold qualifying investment in project-level partnership (sponsor equity) for at least 10 years

◦ Benefits:

− (1) defer/partially exclude gain on the proceeds rolled over into QOF investment (before 2020/2022); and

− (2) exclude gain upon “sale” of QOF investment or obtain basis step-up upon “exchange” liquidating QOF investment.

− Suspended losses to the extent tax losses exceed outside basis


Renewable energy applications - continuedOpportunity zones

• Tax Equity

− Invest through “captive” QOF and hold qualifying investment in project-level partnership (tax equity) for at least 5 years

◦ Benefit:

− (1) defer/partially exclude gain on the proceeds rolled over into QOF investment (before 2020/2022); and

− (2) exclude gain upon “sale”’ of QOF investment or obtain basis step-up upon “exchange” liquidating QOF investment (if held 10 years).

• Technical Issues

− Inside / outside basis disparity

− Allocation of tax credits in excess of outside basis

− Suspended losses to the extent tax losses exceed outside basis


Revenue recognition


451(h) Special rule for utility services (formerly Section 451(f))Unbilled revenue

451(h)(1) In general — In the case of a taxpayer the taxable income of which is computed under an accrual method of accounting, any income attributable to the sale or furnishing of utility services to customers shall be included in gross income not later than the taxable year in which such services are provided to such customers.

451(h)(2) Definition and special rule — For purposes of this subsection —

A. Utility services — The term "utility services" includes –i. the providing of electrical energy, water, or sewage disposal,ii. the furnishing of gas or steam through a local distribution system,iii. telephone or other communication services, andiv. the transporting of gas or steam by pipeline.

B. Year in which services provided — The taxable year in which services are treated as provided to customers shall not, in any manner, be determined by reference to —i. the period in which the customers' meters are read, orii. the period in which the taxpayer bills (or may bill) the customers for such service.


Amendments to Section 451 by the Tax Cuts and Jobs Act – book conformityRevenue recognition

• Section 451(b) requires taxpayers to recognize income no later than the taxable year in which such income is taken into account as income on the taxpayer’s applicable financial statement. However, this requirement does not apply with respect to any special methods of accounting other than for certain rules involving bonds and debt instruments.

−Potential “special methods” may include section 460 (long-term contract accounting), section 475 (mark-to-market accounting)

−Unclear whether prior special methods under section 451 regulations will still apply (e.g. trading stamps and coupons (Reg. Sec. 1.451-4) and deferral of income for sale of goods (Reg. Sec. 1.451-5))

• New subparagraph (b)(4) also provides that for the purposes of recognizing revenue no later than which such income is recognized for financial statement purposes under new subsection (b), taxpayers with contracts containing multiple “performance obligations” will allocate the transaction price to each performance obligation in accordance with financial statement treatment

• Consideration of financial reporting changes pursuant to Accounting Standards Codification 606


Committee report explaining amended IRC Section 451(b) – footnote 872Revenue recognition

The provision does not revise the rules associated with when an item is realized for Federal income tax purposes and, accordingly, does not require the recognition of income in situations where the Federal income tax realization event has not yet occurred. For example, the provision does not require the recharacterization of a transaction from sale to lease, or vice versa, to conform to how the transaction is reported in the taxpayer’s applicable financial statement. Similarly, the provision does not require the recognition of gain or loss from securities that are marked to market for financial reporting purposes if the gain or loss from such investments is not realized for Federal income tax purposes until such time that the taxpayer sells or otherwise disposes of the investment. As a further example, income from investments in corporations or partnerships that are accounted for under the equity method for financial reporting purposes will not result in the recognition of income for Federal income tax purposes until such time that the Federal income tax realization even has occurred (e.g., when the taxpayer receives a dividend from the corporation in which it owns less than a controlling interest or when the taxpayer receives its allocable share of income, deductions, gains, and losses on its Schedule K–1 from the partnership).


Amendments to Section 451 by the Tax Cuts and Jobs Act – prepaymentsRevenue recognition

• Section 451(c) codifies the deferral method of accounting for advanced payments for goods and services currently provided under Rev. Proc. 2004-34, including definition of “applicable financial statement” and “advance payment”

−The election to apply the deferral method is made with respect to a category of advance payments in the year in that category of advance payments is first received and is effective in that year and prospectively. It is considered an irrevocable election with respect to that category of advance payment


Amendments to Section 451 by the Tax Cuts and Jobs Act – transition rulesRevenue recognition

• Effective date and transition rules for Section 451 amendments

−Effective for the taxable year beginning after December 31, 2017

−Implemented as a change in accounting method with a Section 481(a) adjustment

−Tax guidance expected

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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2018 Deloitte Renewable Energy Seminar · 2019-10-22 · 2018 Deloitte Renewable Energy Seminar...

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