R&D Deductions for Power Plants

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Publication February 15, 2017

A power company was able to deduct part of the cost of a new power plant immediately on grounds that the spending was on research and development.

The IRS analyzed the case in an internal memo written to an IRS agent in the field. The memo is Field Service Advice 2017051F.

The utility had built a smaller prototype of the power plant earlier and was finally building one to scale. The power plant has three main systems. It uses largely proven and commercially available equipment. However, one of the systems contains equipment that is first of a kind.

The IRS said that amounts spent on design and installation of the first-of-a-kind equipment would be treated as research spending. This allows the utility to deduct the costs immediately rather than have to spread them over time as depreciation on the power plant.

IRS regulations define research for this purpose as “activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.”

The utility did not deduct the research costs initially, but filed amended tax returns later to do so. The IRS made the internal memo public in early February.


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