IRS Provides Guidance On How To Depreciate Ethanol Plant Assets

August 25, 2009 | Roger McEowen

The IRS has issued a notice of proposed revenue ruling providing guidance on the depreciation of tangible assets at ethanol plants.  Under the facts of the ruling, the taxpayer owns an ethanol plant that uses a dry milling process to produce fuel grade ethanol.  The taxpayer grinds the corn it receives from producers into flour, mixes the flour with water, heats the resulting mixture and adds enzymes to convert the starch into sugar.  The product is then put in fermentation tanks and yeast is added.  The mash then metabolizes into ethanol and carbon dioxide which can be sold as a by-product.  Water and solids are then separated from the ethanol and the output is further processed via dehydration which serves to increase the alcohol content.  Upon completion of the dehydration process, the fuel grade ethanol is blended with gasoline and stored until it is later sold. 

IRS noted that the amount of the tax deduction for tangible depreciable property is tied to the property’s applicable recovery period and class life.  Depreciable property is pegged to a certain asset class based on the asset’s primary use as determined by the property’s actual purpose and function.  In 1987, IRS issued a Revenue Procedure in which it established the class lives of property. 

Under that Rev. Proc., two broad categories of property of depreciable assets were established – asset categories and activity categories. 

  • One asset class (asset class 49.5) includes assets that are used in the conversion of refuse or other solid waste or biomass (any organic substance other than oil, natural gas or coal) to heat or to a solid, liquid or gaseous fuel.  This class also includes all process plant equipment and structures at the site that are used in the production process, but does not generally include boilers or electric generators.  Assets in this class have a recovery period of seven years (general depreciation system) or 10 years (alternative depreciation system). 
  • Another asset class (asset class 28.0) includes assets that are used to manufacture basic organic and inorganic chemicals, and also includes all land improvements associated with the plant or production processes (but not buildings and structural components).  Asset class 28.0 does not cover, however, assets that are used in the manufacture of finished rubber and plastic products or in the production of natural gas products, butane, propane and the by-products or natural gas production plants.  Assets in class 28.0 have a recovery period of five years (general depreciation system) and 9.5 years (alternative deprecation system).
  • Asset class 33.2 includes assets used in the smelting, refining and electrolysis of nonferrous metals from ore.  In a Revenue Ruling in 1977, IRS said that the chemical processes used to produce alumina fall in this class.  But, IRS also said that assets used to process the alumina for activities other than those required to produce alumina are not in asset class 33.2.

In the Notice, IRS proposes to rule that the corn used in an ethanol plant is biomass and that the fuel grade ethanol produced from the corn is liquid fuel for purposes of asset class 49.5.  Conversely, IRS proposes to rule that asset class 28.0 is inapplicable.  Based on the rationale of Rev. Rul. 77-63, the conversion of corn to fuel grade ethanol by chemical processes does not bar classification in the asset class that specifically applies to the conversion of biomass to fuel (asset class 49.5).  The result of the proposed Revenue Ruling will be that an ethanol plant (as the taxpayer) will be deemed to be primary engaged in the production of liquid fuel from corn, with the taxpayer’s activity being classified in asset class 49.5 (except for I.R.C. §1250 property not described in asset class 49.5 and assets classified in asset classes 00.11-00.4).  Thus, the appropriate recovery period will be seven years (general depreciation system) and 10 years (alternative depreciation system).

Comments on the proposed Revenue Ruling are due by November 23, 2009.    IRS Notice 2009-64 (Aug. 24, 2009).