IRS issues guidance on treatment of electric utility’s R&E expenditures

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March 2017

Overview

The IRS Office of Chief Counsel on February 3 released Field Attorney Advice (FAA) 20170501, addressing the treatment under Section 174 of certain expenditures of an electrical power utility company (taxpayer) related to the development of a full-scale utility plant comprised in large part of property subject to depreciation.

In the FAA, Chief Counsel determined that the taxpayer may, under Rev. Rul. 58-74, amend its income tax returns for open years and deduct certain costs resulting in depreciable property to be used in taxpayer’s trade or business as Section 174-eligible research or experimental (R&E) expenditures to the extent they otherwise qualify under Section 174.

Importantly, Chief Counsel determined that not all costs associated with the development of the power plant, nor all of the plant’s subcomponent costs, are qualifying Section 174 R&E expenditures, on the ground that the plant and its subcomponents do not qualify as a pilot model under Reg. sec. 1.174-2(a)(4).  

Chief Counsel did find that the engineering design and integration costs related to the development of the plant and its components are qualifying Section 174 R&E expenditures since they were incurred to re-engineer and redesign first-of-a-kind (FOAK) equipment.

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Brett Ritter

Brett Ritter

Partner, National R&D Tax Services Leader, PwC US

Randel Friedman

Randel Friedman

Partner, PwC US

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