Safe harbor for short lines - Small-Road Update

Railway Age, April, 2003

The Internal Revenue Service has published a safe harbor for use by Class II and Class III railroads. Revenue Procedure 2002-65, published late last year, applies to the accounting of track costs. It describes the "track maintenance allowance" method, providing a simple formula to calculate the amount of expenditures a railroad may currently deduct and the amount it must capitalize.

The American Short Line and Regional Railroad Association says the election to use the safe harbor is generally available only for tax years ending on or after Dec. 31, 2001. A railroad under audit by the IRS as of Sept. 30, 2002, may elect to use the safe harbor for the audit years.

"The main objective of the IRS in developing this safe harbor is to eliminate the time consuming audit of track records," says ASLRRA. "This new tax accounting method will provide larger tax deductions for some roads, yield roughly the same deduction on some, and result in less current deduction on others when compared to the factual method already in place." The method is similar to a safe harbor offered earlier to Class I's.

If elected, the track maintenance allowance method must be used for all track structure expenditures incurred each year. Once elected, a railroad must use the method for all future years unless permission is requested from the IRS to change it.

Under the IRS's track maintenance allowance method, the taxpayer (railroad) must determine the amount of track structure expenditures that can be deducted as well as thc amount required to be capitalized. As detailed in Section 5 of the Revenue Procedure, the allowance is calculated by determining the track structure expenditures for the taxable year, subtracting from that amount expenditures for new materials, and multiplying the resulting amount by 75%.

The capitalized amount is calculated by determining the track structure expenditures for the taxable year, subtracting the track maintenance allowance, and allocating the resulting expenditures separately to rail and other track materials, ties, and ballast, first to new track. The remaining capitalized amount should represent replacement track and should, says the IRS, "be allocated . . . in proportion to current adjusted conditions."

Calculating such other amounts as "salvage material credits" and "assigned value of relay materials" can get a little tricky. ASLRRA is advising short line and regional railroads to direct questions on IRS Revenue Procedure 2002-65 to IRS Technical Advisor for Railroads Wayne VanDyck at wayne.vandyck@irs.gov, tel. (540) 857-2068; or to Patricia Zweibel in the IRS Office of Chief Counsel, (202) 622-5020. IRS Revenue Procedure 2002-65 can also be downloaded from the ASLRRA website, www.aslrra.org.