Title 15 . Revenue

Chapter 20 . (Repealed)

Section 480. Depreciation expense for oil and gas taxpayers

15 AAC 20.480. Depreciation expense for oil and gas taxpayers

(a) This section applies to taxpayers subject to AS 43.20.072 .

(b) Except as provided for by 15 AAC 20.421(b) (3), a taxpayer shall report depreciation expense for all unitary corporations using the class life asset depreciation range system as applied under Internal Revenue Code section 167 (26 U.S.C. 167) as that section read on June 30, 1981, applied to the depreciable basis determined under the taxpayer's method of reporting federal taxable income for that corporation as if all assets were used inside the United States. However, a taxpayer may elect to report depreciation expense for foreign assets of domestic corporations using a method of reporting depreciation expense under the class life asset depreciation range system as applied to foreign assets if that rate of depreciation is slower than the rate of depreciation otherwise reportable under this section.

(c) A taxpayer that reports financial statement income as federal taxable income of foreign corporations under 15 AAC 20.300(f) may elect to report the depreciation used to determine financial statement income for those corporations. A taxpayer that reports earnings and profits as federal taxable income of controlled foreign corporations under 15 AAC 20.300(f) may elect to report the depreciation used to determine the earnings and profits for those controlled foreign corporations.

(d) Depreciation methods shall be treated as methods of accounting. Under this section, the taxpayer shall segregate its combined group into domestic corporations, controlled foreign corporations, and foreign corporations that are not controlled foreign corporations. A taxpayer shall report depreciation for each segregated group of corporations using a single overall method allowed under this section for that group: the class life asset depreciation range system, the depreciation used to determine financial statement income, or the depreciation used to determine earnings and profits. A taxpayer may apply the class life asset depreciation range system to determine depreciation for any group of corporations. Subject to an election under this section, for foreign corporations, including controlled foreign corporations, a taxpayer may use the depreciation used to determine financial statement income, and for controlled foreign corporations, a taxpayer may use the depreciation used to determine earnings and profits.

(e) A taxpayer filing a return under AS 43.20.072 for the first time shall elect on its return a depreciation method under this section for controlled foreign corporations, and a depreciation method for foreign corporations that are not controlled foreign corporations. The taxpayer shall apply the method it elects under this subsection as if it had been in place on the date of acquisition of each asset.

(f) The members of a consolidated group of Alaska taxpayers shall use the same depreciation methods. Taxpayers joining in the making of an Alaska consolidated return for the first time shall apply the depreciation methods established by a parent taxpayer, if any. If there is no parent taxpayer, the consolidated group shall use the depreciation methods in place for the taxpayer having the largest presence in this state during the initial year of consolidation, as measured by its property numerator. A taxpayer entering an existing Alaska consolidated group shall conform to the existing group's depreciation methods. A corporation that ceases to be subject to AS 43.20.072 and in a subsequent tax year again becomes subject to AS 43.20.072 shall apply the depreciation methods applicable during the last previous tax period in which it was subject to AS 43.20.072 unless it is required to use the depreciation methods established by a pre-existing consolidated group of Alaska taxpayers of which it is part when it again becomes subject to AS 43.20.072 .

(g) Notwithstanding the provisions of (h) of this section barring a taxpayer from changing a depreciation method without the prior approval of the department, a taxpayer may change a depreciation method in its return for its first tax year beginning on or after January 1, 1998, to conform to this section without the prior approval of the department. The return reporting the change must include

(1) a declaration that the taxpayer is changing its depreciation method to conform to this section;

(2) a disclosure of the taxpayer's new and old depreciation methods by group or by company if all members of a group did not apply the same method; and

(3) a calculation of the adjustment required under (h) of this section for each member of the unitary group.

(h) Except as required upon consolidation under (f) of this section, a taxpayer may not change a depreciation method without the prior approval of the department. If a taxpayer changes a depreciation method, including a change under (g) of this section, it shall report and include in its income in the year of change and the four tax years thereafter an equal amount representing the cumulative effect of the change necessary to prevent depreciation from being duplicated or omitted in the determination of apportionable income. The adjustment shall be apportioned using the higher of the taxpayer's apportionment factor for the year prior to the change in method or its apportionment factor for the year of change. If an existing taxpayer becomes an oil and gas taxpayer subject to AS 43.20.072 for the first time, the reporting of depreciation under AS 43.20.072 is not a change in method under this section.

(i) A taxpayer shall maintain complete records for each asset of each unitary foreign corporation for which depreciation is reported using the class life asset depreciation range system. Two or more assets properly aggregated in a vintage account shall be treated as a single asset under this subsection. The records maintained by the taxpayer must contain

(1) an adequate description of the asset to determine the asset guideline class;

(2) the date the asset was first placed in service and the first year convention used to calculate depreciation;

(3) an identification of the asset as new or used property;

(4) the depreciable basis of the asset;

(5) the method and rate used to compute depreciation expense under this section and in the determination of federal taxable income under 15 AAC 20.300;

(6) the salvage value of the asset; and

(7) the date of sale or other disposition, the proceeds or other consideration, and the gain or loss under this section and under the method used in the determination of federal taxable income under 15 AAC 20.300.

(j) The department will, in its discretion, require a taxpayer to report depreciation using the methods of depreciation allowed under (c) of this section consistent with the overall method of reporting federal taxable income upon a finding by the department that the taxpayer has made a material error or failed to maintain complete records under (i) of this section. A material error is a misstatement of depreciation expense that exceeds the lesser of 10 percent of the depreciation expense reported for a group or $10,000,000, calculated by combining the absolute value of all errors for the group.

(k) A taxpayer that reported other business income in its last tax year ending before January 1, 1998 shall report depreciation of assets placed in service for those operations as follows:

(1) assets placed in service during a tax year beginning on or after January 1, 1998 shall be depreciated under this section; and

(2) assets placed in service during a tax year ending before January 1, 1998 shall be depreciated in tax years thereafter using the lives and methods established in the last return filed before January 1, 1998; however, the taxpayer may change its depreciation for assets placed in service during tax years beginning before January 1, 1998 without the prior approval of the department as authorized by (g) of this section.

History: Eff. 4/4/82, Register 82; am 3/17/85, Register 93; am 3/6/98, Register 145

Authority: AS 43.05.080

AS 43.20.072