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Will the expired tax break impact utilities as much as other industries?

Isakson Portrait_smallThis author no longer works for DNV GL.

In a recent Wall Street Journal article, “The Morning Ledger: Expired Tax Break Could Weigh on Cash Flow” David Hall discussed impacts which may be suffered this year by capital-intensive companies due to the expiration of a popular tax break for equipment purchases. But will this expired tax break impact utilities as much as other industries?

The repealed bonus depreciation applied to for the first year you place property or equipment in service can be substantial. For qualified property placed in service in 2013, you can take an additional 50% in special allowance. The allowance is an additional deduction you can take after any section 179 deduction and before you figure regular depreciation under MACRS for the year you place the property in service. Because it reduces the “tax bite” for first year equipment, new or advanced equipment and technologies suffer. This may include fuel cells, advanced storage designs, biofuels and the like which requires substantial upfront investment and/or requires a long period of time before revenue is allowed.

For utilities, removal of bonus depreciation will impact tax credits that utilities use to reduce tax bills and improve cash flows. Depreciation bonuses are one of several items that are used to improve the economics for capital approvals on projects, so the most immediate impact would be to reduce capital project approvals. Another impact would be to increase short term borrowings or reduce the value of tax carry forward transactions.  For example, see FirstEnergy’s SEC filing on 3/4/2014 stated on page 152 of the PDF (and page 162 of the electronic file itself) states:  During 2013, FirstEnergy settled a claim with the IRS for approximately $1.0 billion of additional accelerated (bonus) depreciation deductions for certain generation property for the 2010 taxable year, which resulted in a carryback refund of approximately $110 million, an increase in the NOL carry forward of approximately $65 million, with a corresponding increase to accumulated deferred income taxes for this temporary tax item and an overall decrease to FirstEnergy’s effective tax rate of approximately $2 million for adjustments to interest resulting from the settlement.  One possible way to measure impacts is to use FERC 401 data to benchmark impacts on cash flows and for hypothetical project types.

Larger impacts may be also be felt by the developers of the technology. Several of the projects that DNV GL has provided expertise and guidance upon has shown the importance of tax credits and grants supporting development of new technology. It would be interesting to document and provide impacts to developers.

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