In recent years, the IRS has permitted certain amounts of accelerated tax depreciation (i.e., bonus depreciation) whereby 50 percent, or as much as 100 percent, of a property’s cost may be deducted in the year placed in service. Utilities and power companies commonly elect bonus depreciation. By accelerating income tax deductions, bonus depreciation may give rise to net operating losses. ASC 740 requires that a valuation allowance be recorded against deferred tax assets that are not likely to be realized. Potential sources of taxable income that can be used to support realization include loss carrybacks and carryforwards, the reversal of existing deferred tax liabilities, tax planning strategies, and future projections. See TX 5 for information on evaluating the realizability of net operating losses and other deferred tax assets.

For regulated utilities, it is important to note that net operating loss-related deferred tax assets arising from accelerated depreciation must offset the related deferred tax liabilities for ratemaking purposes to avoid a potential normalization violation.