Industries

June 2008

RSM McGladrey’s ethanol team returned to Washington, D.C. on June 5 to continue discussions with the Internal Revenue Service’s Office of Chief Counsel regarding their depreciation position related to ethanol plant equipment. The IRS has recently examined several ethanol producers’ tax returns and is challenging the determination that a five-year cost recovery period is more appropriate for ethanol related equipment than a seven-year cost recovery period. In support of IRS field audit requests, the IRS released in April 2008 a Chief Counsel Advice Memorandum that affirmed the IRS position: The predominate depreciable lives of ethanol plants should be seven-years versus five-years.

Although an IRS Chief Counsel Advice Memorandum cannot be cited as precedent in taxpayer proceedings, it certainly indicates the IRS’ position on the issue. The ethanol industry continues to support that a five-year cost recovery period is applicable to most depreciable assets in fuel ethanol plants.

This issue is important to ethanol producers as a typical ethanol plant, with a production capacity of 100 million gallons per year, receives a net present value benefit of approximately $2.5 million by using a five-year tax depreciable life as opposed to a seven-year tax depreciable life.

RSM McGladrey, the Renewable Fuels Association and its legal counsel have participated in two on-site meetings with the IRS and/or the U.S. Treasury Department to discuss the IRS position. Most recently, on June 5, the RSM McGladrey team returned to Washington, D.C. for discussions with the IRS Office of Chief Counsel.  As a result of the meeting, the IRS more clearly understands the industry position and its importance.  In response to the information presented during the meeting, the IRS indicated that it will consider the future direction of its existing position and determine if its position needs to be modified or enhanced in light of discussion points made.  The RSM McGladrey team will continue to actively monitor this issue.

To respond to and address these challenges from the IRS, you must have a thorough understanding of the ethanol industry and related tax laws. RSM McGladrey has a team that is focused on serving the ethanol industry. We work with ethanol producers, as well as other ethanol industry leaders and stakeholders, to help shape the rapidly changing tax environment. This team understands the unique industry characteristics and has the experience necessary to address this depreciation issue and other ethanol industry-specific questions that may arise.

Further details on these developments will be communicated via Ethanol Action Alerts published by the RSM McGladrey Ethanol Industry Team. If you would like to set up an appointment with an RSM McGladrey tax advisor to discuss this issue, please contact Lance Massmann at lance.massmann@rsmi.com or 605.575.0508 or Dustin Petersen at dustin.petersen@rsmi.com or 515.558.6600.

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