Implications of 163(j) for utilities
Lucasys Tax and Fixed Asset solutions meet the unique requirements of asset-intensive and regulated industries. When proposed or enacted regulations have specific carve-outs and applications for our customers, we work with you to understand the impacts and provide you with the tools necessary to execute on your organization’s tax and finance strategy.
A brief recap.
On Monday, November 26, 2018, the Treasury Department published proposed regulations relating to section 163(j), as amended by the Tax Cuts and Jobs Act. For utilities with regulated operations (excepted trade or business) and non-regulated operations (non-excepted trade or business), the proposed regulations provide additional clarity regarding the applicability of the interest limitation on the consolidated group.
Specifically, the proposed regulations provide a de minimus test whereby if 90% of a taxpayer’s adjusted basis in its assets is allocable to either excepted or non-excepted trades or businesses, then all of the taxpayer’s business interest expense or business interest income is allocated to that category.
In practice, for utilities with predominately regulated operations, the de minimus test allows those utilities to continue to take the full interest deduction for their consolidated operations if the utility meets the required criteria of the test.
Performing the calculation.
In order to perform the de minimus test, utilities must be able to:
Maintain separate fixed asset records for utility and non-utility property, plant, and equipment.
Most utilities will already have met this requirement for purposes of regulatory reporting.Compute adjusted basis using the Alternative Depreciation System (ADS) under section 168(g).
Some utilities may have an ADS computation if used for state depreciation or Earnings and Profits reporting requirements. Note that if the ADS computation is not reviewed and maintained annually, the computed adjusted basis may require review.Perform a computation of adjusted basis as of the last day of each fiscal quarter.
The proposed regulations require that the adjusted basis is computed as of the last day of each quarter, and that the average of the quarters be used to determine whether the 90% de minimus threshold is met. For utilities performing annual depreciation computations, the requirement to track ADS basis quarterly provides an additional challenge.
Meeting the reporting requirements.
Utilities performing an allocation under the proposed regulations must attach a statement to their federal income tax return. The statement must be titled “Section 163(j) Asset Basis Calculations” and include information about the adjusted basis of the assets and the method used to determine the basis. If a utility does not file the required statement or files a statement that does not comply with the requirements,the IRS may treat the utility as if all of its interest expense is properly allocable to its non-regulated operations, and therefore subject to the limitation on interest deductibility.
Taking into account additional considerations.
Utilities have the option to elect the proposed regulations for tax years after December 31, 2017, so time is of the essence for tax year 2018.
Meeting the requirements of the 90% de minimus test and taking the full interest deduction on the consolidated group will also require the utility to forego bonus depreciation for non-utility property.
Planning for compliance.
The IRS is expecting extensive public comment and a hearing is scheduled on February 25, 2019. However, there is no guarantee that significant changes to the proposed regulations will be adopted. Utilities with regulated and non-regulated operations should spend the time to assess how the proposed regulations impact their business, and whether they are prepared for the computation and reporting requirements.
Lucasys software solutions give utilities the resources and tools they need to react to changing regulations, procedural guidance, and business operations. Contact us to learn more about how utilities are leveraging Lucasys Tax software to meet the proposed requirements under 163(j).