What Is the Section 179C Election for Refineries?

The Section 179C election was a federal tax incentive from the Energy Policy Act of 2005, designed to encourage increased domestic refinery capacity. This provision, which is no longer active, applied to property placed in service before January 1, 2014. It permitted certain taxpayers to immediately expense a portion of the cost of qualifying property rather than capitalizing and depreciating it over many years. This accelerated deduction lowered the taxpayer’s current taxable income. The goals were to support the expansion of existing refineries and the construction of new ones to enhance the nation’s fuel production.

Taxpayer Eligibility Requirements

To have qualified for the Section 179C deduction, a taxpayer had to be classified as a “small business refiner” based on two operational metrics. The first criterion was production volume. A refiner met this test if its average daily domestic crude oil input, or the input of any other feedstock, did not exceed 200,000 barrels for the one-year period ending on the last day of the month preceding the month in which the taxable year began.

The second requirement was tied to the size of its workforce. The taxpayer had to have employed, on average, no more than 1,500 individuals directly in its refining operations on any given day during the prior taxable year. Both the production volume and employee limitations had to be met for a taxpayer to be considered a small business refiner.

Cooperatives that qualified as a small business refiner had a unique option. These entities could elect to allocate the deduction to their owners, proportional to each owner’s interest in the cooperative. The cooperative was then required to provide a written notice to each owner detailing the amount of the allocated deduction.

Identifying Qualified Refinery Property

The deduction was only available for investments in “qualified refinery property.” The property had to be tangible, subject to the allowance for depreciation, and its original use had to have commenced with the taxpayer. This meant the taxpayer had to be the first one to place the asset into service, as used or second-hand property did not qualify.

The property had to be placed in service by the taxpayer after August 8, 2005, and there could not have been a binding construction contract in effect before June 14, 2005. The property also had to adhere to all applicable federal, state, and local environmental laws and regulations in effect on the date it was placed in service.

The property’s function was also a determining factor. It had to be part of a refinery owned by a small business refiner and serve one of two purposes. The first was to enable the refiner to process liquid fuel from crude oil. The second was for property that helped produce transportation fuels in compliance with Environmental Protection Agency (EPA) sulfur regulations.

Calculating the Deduction Amount

A taxpayer who made the Section 179C election could deduct 50 percent of the cost of qualified refinery property in the year it was placed in service. The remaining 50 percent of the cost was then capitalized and depreciated according to standard MACRS (Modified Accelerated Cost Recovery System) rules. This immediate expensing provided an upfront tax benefit compared to recovering the cost over a longer depreciation schedule.

The deduction was subject to a limitation based on the taxpayer’s total investment in such property. The 50 percent deduction was reduced if the total cost of qualified refinery property placed in service during the year exceeded a specific investment ceiling. The purpose of this phase-out was to target the incentive toward smaller-scale projects.

How to Make the Election

The Section 179C election was a formal process completed on a timely filed tax return for the year the property was placed in service. The election was made on a property-by-property basis. This gave taxpayers flexibility to choose which qualifying assets would be subject to the immediate expensing provision.

To claim the deduction, the taxpayer had to file Form 4562, Depreciation and Amortization, with their federal income tax return. A separate statement also had to be attached to the return. This report included the name and address of the refinery and information confirming the property met production capacity requirements.

Once made, the election was generally irrevocable for that property except with the consent of the IRS. This meant a taxpayer could not later amend their return to undo the election without obtaining specific permission from the Secretary of the Treasury. Failure to make the election properly on a timely filed return could result in the loss of the deduction.