2020 Deloitte Power & Utilities Conference Knowledge to thrive

2020 Deloitte Power & Utilities ConferenceKnowledge to thrive December 1, 2020

Dave Yankee, Managing Director, Deloitte Tax LLP

Federal income tax

update

2020 Deloitte Power & Utilities ConferenceCopyright © 2020 Deloitte Development LLC. All rights reserved. 3

Federal Income Tax Update

Dave YankeeManaging DirectorDeloitte Tax LLP312 [email protected]

Today’s speaker

mailto:[email protected]


AgendaFederal Income Tax Update

• TCJA excess deferred tax guidance

• Ratemaking considerations of various potential income tax proposals

• Fact patterns that may still result in 35 percent tax benefits

• Disallowance of transportation expenses

• Recent normalization private letter rulings

• Forthcoming federal income tax guidance


What best describes your role in your organization?

1. Financial reporting

2. Tax

3. Regulatory

4. Audit

5. Don’t know/Not applicable

Polling question #1

Copyright © 2020 Deloitte Development LLC. All rights reserved. 62020 Deloitte Power & Utilities Conference

TCJA excess deferred tax guidance


IRS guidance FERC guidance

Tax Cuts and Jobs Act excess deferred taxes

• Meetings and discussions with the IRS

• Availability of private letter rulings

• Added to 2018–2019 Priority Guidance Plan for the Department of the Treasury and the Internal Revenue Service released November 8, 2018 (updated April 5, 2019)

− Guidance under §§168(f)(2) and (i)(9) addressing excess deferred income taxes and public utility companies.

• Notice 2019-33 (released May 7, 2019) – Request for Comments on Necessary Clarifications to Normalization Requirements for Excess Tax Reserves Resulting from the Corporate Tax Rate Decrease

−Comment letters were due on July 29, 2019

• Private letter rulings 202017015 and 202033002

• Rev. Proc. 2020-39 – released August 14, 2020

• Notice of inquiry – released March 15, 2018

• Policy statement – released November 15, 2018, published in the Federal Register on November 23, 2018

• Notice of proposed rulemaking – released November 15, 2018

• Orders regarding formula rate template changes

• Orders to companies with stated rates

• Order No. 864 – released on November 21, 2019, published in the Federal Register on November 27, 2019


Areas to revisitReacting to the TCJA excess deferred tax normalization guidance

• Whether the book depreciation rate or amount used to reverse “protected” excess deferred tax reserves includes a removal cost factor

• Reflecting revised remaining book lives after post-2017 periodic book depreciation studies

• Understanding pre-tax retirement accounting and the effects on excess deferred tax amortization

−Day-to-day retirements

−Early retirements of generation facilities

−Casualty losses

• Prorating excess deferred tax liabilities if “regular” deferred tax liabilities are prorated

• Companies subject to multiple regulators – coordination of excess deferred tax rate base adjustments and amortization between or among revenue requirement calculations

• Whether TCJA rate orders and rate settlements permit or require excess deferred tax adjustments after IRS guidance is issued

• Requests for FERC approval of another method for excess or deficient deferred taxes following the sale or retirement of an asset


Ratemaking considerations of various potential income tax proposals


Lessons learned from TCJAWhat if the corporate tax rates were to change again?

• Statutory normalization requirement

−Prior normalization requirements did not mandate refunds, but limited the rate of refunds of depreciation-related excess deferred taxes

−Measurement of the excess or deficiency as of enactment date or effective date

−Consideration of fiscal year taxpayers

−Whether an approach simpler than ARAM should serve as the limit

• Regulatory settlements

−Timing of regulatory proceeding relative to the effective date of the tax rate change

−Specific DTAs and DTLs

• Financial reporting

−Interim reporting?

−Remeasurements

−Regulatory lag

• Impact on un-refunded or over-refunded TCJA excess deferred taxes


Facts, ratemaking impact, potential normalization requirementWhat if a corporate AMT-like tax were enacted (re-enacted)?

• Tax Reform Act of 1986 corporate alternative minimum tax adjustment: book income adjustment → adjusted current earnings adjustment

• Will a credit be available – prepaid tax v. surcharge?

−Rate base inclusion of any carryforward v. increased regulatory tax expense for any surcharge

−Formula rate templates

• Will tax depreciation affect the amount of any additional tax?

−Normalization requirement for former corporate AMT

−Suggestions for any normalization requirement related to a tax similar corporate AMT or book earnings adjustment


Potential proposalsMonetization of tax credits

• Monetization proposals

−Credit carryforwards become refundable

−Refundable credits for renewable energy facilities placed in service during a limited time period or renewable energy facilities with construction beginning during a limited time period

−Broader than renewable energy PTC and ITC?

• Other related tax proposals

−Limited Section 263A exemption

−Limited exemption from the normalization requirements


• Credits with realization dependent on taxable income are generally recognized as a reduction of income tax expense

• If realization of a tax credit does not depend on the entity’s generation of future taxable income or the entity’s ongoing tax status or tax position, the credit is not considered an element of income tax accounting under ASC 740

−Even if the credit claims are filed in connection with a tax return

• If a jurisdiction historically required that a credit be realized on the tax return as a reduction in taxes payable, but subsequently changes the law so that the credit can be realized without an entity’s first incurring a tax liability, the entity would generally continue to apply ASC 740 to the credits recognized at the time of the law change

−Impact on ASC 740-270 forecasted annual effective tax rate computations

• Consider historical financial reporting and existing accounting policy for refundable credits or similar forms of government assistance

• Evaluate whether the transaction constitutes an exchange or a contribution

• Consider a grant accounting or a gain contingency model and, if applicable, the effects of ASC 980

GAAP analysisMonetization of tax credits


What do you expect the corporate federal income tax rate will be in 2022?

1. 20 percent or lower

2. 21 percent

3. 25 percent

4. 28 percent

5. 35 percent or higher


Polling question #2


Fact patterns that may still result in 35 percent tax benefits


Carrybacks, amended returns and Section 1341 tax computationsFact patterns that may still result in 35 percent tax benefits

• Five-year NOL carrybacks pursuant to the CARES Act

−Available for losses in 2018-2020

−Tax planning (e.g., tax accounting method changes)

• Re-visiting prior 10-year carrybacks for pre-2018 tax years

−Former Section 172(f) items (e.g., workers compensation, remediation of environmental contamination, nuclear decommissioning)

−Impact of 2020 final Section 468A regulations regarding nuclear decommissioning costs

• Tax planning related to amended returns

−Items that affect lifetime taxable income (i.e., not subject to the requirement to file an application for a change in tax method of accounting)

−Rev. Proc. 2020-50 allowing amended returns (or tax accounting method changes) to retroactively apply the 2019 and 2020 final bonus depreciation regulations

• Section 1341 tax computations

−Permits a “credit” on a current-year tax return in lieu of a deduction for an amount refunded to utility customers that had been previously recognized as taxable income in a tax year with a higher tax rate


Regulatory considerationsFact patterns that may still result in 35 percent tax benefits

• Was the tax benefit caused by the regulated utility and an item with a pretax effect reflected in ratemaking?

• Accounting for consolidated tax benefits or detriments on separate company financial statements of subsidiaries, including regulatory reporting

• Effect of tax-sharing agreement

• TCJA rate orders and regulatory settlements

• Formula rate templates and other standard regulatory tax computations

• Whether it is more appropriate to record a regulatory liability or an income tax benefit

• Accounting and ratemaking for uncertain tax positions


Disallowance of transportation expenses


OverviewDisallowance of transportation expenses

• The Tax Cuts and Jobs Act amended Section 274 and disallows deductions for the expense of any qualified transportation fringe provided by taxpayers to their employees for expenses paid or incurred after December 31, 2017.

• Qualified transportation fringes include “qualified parking” with respect to facilities owned or leased by employers and amounts paid to third parties for employee parking.

• IRS Notice 2018-99 and proposed regulations released in June 2019

−“Total parking expenses" means all expenses of the taxpayer related to total parking spaces in a parking facility including, but not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately).

−Does not include (i.e., disallow) depreciation on a parking facility owned by a taxpayer and used for parking by the taxpayer's employees

−Prop. Reg. Sec. 1.274-13(b)(9) defines the term “inventory/unusable spaces” as the spaces exclusively used or reserved for fleet vehicles used in the taxpayer’s business, or that are otherwise not usable for parking by employees and provides examples of such parking spaces – parking spaces for vehicles owned by an electric utility used exclusively to maintain electric power lines.


Ratemaking considerationsDisallowance of transportation expenses

• Rate recovery of tax expense associated with the non-deductible expense

• Do revenue requirement computations facilitate recovery/sharing of the tax effects permanent book/tax differences?

• Whether formula rate templates accommodate an increase in regulatory tax expense for non-deductible costs for which the pretax amounts are recoverable

−Review notes, workpapers and worksheets regarding the depreciation of AFUDC-equity


Which best describes the parking facility that you utilize when working in you employer’s office?

1. My employer provides free parking in a multi-story parking structure.

2. My employer provides free parking in a surface level lot.

3. I pay for parking.

4. I take public transportation.


Polling question #3


Recent normalization private letter rulings


2019-2020 normalization private letter rulings

• Proration, true-up of proration, two-step averaging – PLRs 201929012, 201930015, 201930016 and 201949006

• Restructuring resulting in the direct or indirect acquisition of all of the partnership interests of a rate-regulated partnership – PLR 202009014

• Infrastructure surcharge (repair/disposition-related method change, NOL carryforward) – PLR 202010002

• Timing of the impact of retroactive extension of bonus depreciation on rate base – PLR 201921005

• Excess deferred taxes

−Net depreciation-related ADIT that existed prior to the changes in tax methods of accounting for repairs and dispositions is not subject to the normalization method of accounting after implementation of the new tax method of accounting– PLR 202017015

−Deferred taxes resulting from removal costs not subject to the normalization requirements–PLR 202033002

• Definition of public utility property (i.e., scope of the normalization rules)

−Generation facility owned by the utility – PLRs 201923019, 202017027, 202032002, 202033002, 202034004, 202042005, 202046007, 202047004

−Generation facility owned by a partnership in which the utility is a partner and PPA customer–PLRs 201946007, 202020011


Definition of public utility propertyScope of the normalization requirements

• “Guidance on public utility property under §168(i)(10).”

−Added to 2020–2021 Priority Guidance Plan for the Department of the Treasury and the Internal Revenue Service released November 17, 2020

• Likely next steps and timing

• Participation in the process

• Impact on existing private letter rulings

• Impact on pending private letter ruling requests – Rev. Proc. 2020-1

−Section 5. Under what circumstances do the associate offices issue letter rulings?

−Under some circumstances before the issuance of a regulation or other published guidance

−Answer is clear or is reasonably certain.

−Answer is not reasonably certain.

−Section 6. Under What Circumstances Does The Service Not Issue Letter Rulings Or Determination Letters?

−Ordinarily not before issuance of a regulation or other published guidance


For which aspect of the normalization rules would immediate generic tax guidance most benefit the utility industry?

1. A list of protected v. unprotected plant-related basis differences

2. A “set-it-and-forget-it” option for ARAM amortization of excess deferred taxes

3. Clarification of the definition of “public utility property” to address “non-traditional” ratemaking used for renewable energy facilities and use of partnerships

4. Repeal of the normalization requirements for renewable energy generation facilities in competitive situations


Polling question #4


Forthcoming federal income tax guidance


Forthcoming federal income tax guidance

• Final regulations – Section 1031 – tax-deferred like-kind exchanges

• Final regulations – Sections 451(b) and 451(c) – revenue recognition

• Second set of final Section 163(j) regulations

−“Corrections” to the first set of final Section 163(j) regulations?

• Update of Reg. Sec. 1.48-9 – ITC eligibility (e.g., energy storage equipment)

• Unit-of-property safe harbor guidance for gas utilities

• Related party loss rules – sales of electricity?


Closing Remarks


Federal Income Tax Update

Dave YankeeManaging DirectorDeloitte Tax LLP312 [email protected]

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2020 Deloitte Power & Utilities Conference Knowledge to thrive

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