IRS Introduces Safe Harbor Method for Accounting Expenses in Natural Gas Infrastructure

The Internal Revenue Service recently issued Revenue Procedure 2023-15, which introduces a new safe harbor method of accounting for taxpayers looking to determine whether they need to capitalize or deduct expenses associated with repairs, replacements or improvements to natural gas transmission and distribution property.

However, gathering systems, such as pipelines from going from individual wells to a compressor station, are specifically excluded from this revenue procedure. The release of this guidance stems from the challenges taxpayers faced in discerning what defined a unit of property in their vast, interconnected transmission and distribution network.

In response to these challenges, the IRS introduced the “natural gas transmission and distribution property safe harbor method of accounting” or “NGSH Method,” effective for tax years ending after May 1, 2023. Taxpayers who elect to use this safe harbor accounting method must first distinguish between linear and nonlinear property. Linear property includes pipes, valves, casings, and fittings. While nonlinear property consists of compressor station, gas storage and gas regulating property. Taxpayers who choose to use the new accounting method on linear property may also use it for nonlinear property but are not required to do so. However, if taxpayers elect to use the NGSH Method for nonlinear property, they are then required to also do so with linear property.

Next, the revenue procedure provides the specific accounting methods for each class of property, and details how the NGSH method should be calculated and adopted. The IRS is allowing taxpayers to choose between using a 481(a) adjustment or a specified cut-off method to implement the new accounting method. Lastly, the IRS publication details the procedures for taxpayers to obtain automatic consent from the IRS to change to the new safe harbor accounting methods.

With the complexity of this guidance and the rules being effective for 2023 tax returns, please reach out to your tax advisor soon to determine if this Revenue Procedure affects you and how you can plan to implement the new rules.

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To learn more, visit our Energy and Resources Industry Group page.