Struggling ethanol producers won an important decision by the Internal Revenue Service this week that allows them to retain the current five year depreciation for assets.

Following over a year of intense work by the Renewable Fuels Association with the IRS, the agency has issued a Notice of Proposed Revenue Ruling clarifying that it will not seek to impose a change in the cost recovery periods used by most ethanol producers. Historically, most ethanol producers have used cost recovery (or depreciation) periods of five years. About 18 months ago, IRS advised the industry that the cost recovery period should be seven years instead of five years, and that had to be retroactive, and would apply to all tax returns of ethanol producers that were still open for examination by the IRS. The RFA succeeded in persuading the IRS not to make their decision retroactive.

The RFA told the IRS that their the ruling should not apply retroactively since it would result significant costs to producers who, in good faith, relied on the IRS’ previous acceptance of the 5 year depreciation recovery period for such assets. In response to RFA’s position, the IRS has proposed that the depreciation classification would apply to assets placed in service on or after the publication of a final revenue ruling. To prevent such retroactive application, the IRS specifically provided that it “will not require taxpayers to adopt this depreciation classification for tangible assets used in converting biomass to a liquid fuel such as fuel grade ethanol that are placed in service prior to the publication of a final revenue ruling.”

The IRS has invited public comments on the proposed revenue ruling. Comments are due by November 23, 2009. A final revenue ruling will not be issued until the comments have been considered.