In PLR 201940992, the IRS ruled that a taxpayer may amend its federal tax return to claim additional investment tax credits under the IRC Section 48 energy credit on the increased amount of the depreciable cost basis due to an accounting method change related to self-constructed asset capitalization.

Facts

Taxpayer owns subsidiaries that file a consolidated federal income tax return and use an accrual method of accounting. Taxpayer's consolidated group provides energy and natural gas services. The subsidiaries invest in, own, and operate solar and onshore wind projects that provide residential and commercial customers with low-carbon emission solutions to generate clean power.

For several years, one or both subsidiaries placed in service self-constructed property that uses solar energy to generate electricity. Taxpayer determined that this self-constructed property satisfied the IRC Section 48(a)(3) definition of qualified energy property and claimed a 30% IRC Section 48 credit on the cost basis of the property placed in service in each applicable fiscal tax year.

Taxpayer subsequently filed a Form 3115, Application for Change in Accounting Method, with a net positive IRC Section 481(a) adjustment. The adjustment reflected the difference between the adjusted basis of the self-constructed property under Taxpayer's present and proposed accounting methods as of the beginning of the year of the accounting method change.

Taxpayer represents that the IRC Section 481(a) adjustment includes mixed-service costs capitalizable to self-constructed property that Taxpayer placed in service during the second through fourth fiscal tax years, less the amount of allowable depreciation as of the beginning of the year of the accounting method change. Taxpayer also represents that the costs were determined under the direct reallocation method described in Treas. Reg. Section 1.263A-1(g)(4)(iii)(A).

Law and analysis

Under IRC Section 48(a)(1), the energy credit for any tax year generally equals the energy percentage of the basis of each energy property placed in service during the tax year. Section 481 describes the rules for computing taxable income after changing the method of accounting.

Taxpayer represents that its new accounting method capitalizes more costs to the self-constructed property than Taxpayer's previous method. Once the accounting method change has been implemented and the IRC Section 481(a) adjustment taken into account, Taxpayer will have a higher basis in the property, reflecting the additional capitalizable costs, as if Taxpayer used the new method of accounting all along. The IRC Section 481(a) adjustment likely has imputed depreciation for prior periods, which will cause that amount to differ from the depreciable cost basis used to derive the additional investment tax credit.

As a result of the new accounting method, the IRS ruled that Taxpayer may claim additional investment tax credits under IRC Section 48 on the increased amount of the depreciable cost basis on its amended federal income tax return for the year of the accounting method change. This is because the year of the accounting method change was the first tax year after the energy property was placed in service that the additional capitalized costs were properly reflected in the depreciable cost basis of the energy property.

Implications

Companies may want to review their tax accounting methods for capitalized interest and indirect costs from self-constructed ITC-eligible fixed assets in order to claim additional investment tax credits.

———————————————