Federal Tax Incentives: Qualified Railroad Track Maintenance Credit (IRC § 45G)

Background 

 

Under I.R.C. § 45G, eligible taxpayers may claim the railroad track maintenance credit (RTMC) for qualified railroad track maintenance expenditures (QRTME) paid or incurred during the tax year. This credit incentive applies to qualified railroad track maintenance expenditures paid or incurred during taxable years beginning after December 31, 2004, and before January 1, 2023. See I.R.C. § 45G(f).

 

I.R.C. § 45G(a) provides, in general, the railroad track maintenance credit for the taxable year is equal to 50% of the qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer during the taxable year.

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See below for further details.

(1) 50% of the qualified railroad track maintenance expenditures

"Eligible railroad track" is railroad track located within the United States that is owned or leased by a Class II or Class III railroad at the close of its tax year. The railroad is treated as owning the railroad track if it is subject to depreciation under section 167 by the railroad. Double track is treated as multiple lines of railroad track, rather than as a single line of railroad track. That is, one mile of single track is one mile, but one mile of double track is two miles. See Form 8900 Instructions.

 

I.R.C. § 45G(d) defines the term “qualified railroad track maintenance expenditures” (QRTME) means gross expenditures (whether or not otherwise chargeable to capital account) for maintaining (i.e. repairing, and improving a qualifying railroad structure) railroad track (including roadbed, bridges, and related track structures) owned or leased as of January 1, 2015, by a Class II or Class III railroad (determined without regard to any consideration for such expenditures given by the Class II or Class III railroad which made the assignment of such track).​

 

If you paid or incurred QRTME during the tax year, you do not have to reduce that QRTME by any amount of direct or indirect reimbursement to which you are entitled from a Class II or Class III railroad which made an assignment of eligible railroad track to you.

 

"Qualifying railroad structure" is property located within the United States that includes, in part, tunnels, bridges, and railroad track. For a complete description, see Regulations section 1.45G-1(b)(4). See Form 8900 Instructions.

(2) paid or incurred by an eligible taxpayer during the taxable year.

I.R.C. § 45G(c) defines the term “eligible taxpayer” means—

  • any Class II or Class III railroad, and

    • I.R.C. § 45G(e)(1) defines the terms “Class II railroad” and “Class III railroad” have the respective meanings given such terms by the Surface Transportation Board. 

      • For regulatory purposes, railroads are classified as Class I, II, or III based on their annual operating revenues. Class II and III railroads are sometimes referred to as regional, local, or shortline railroads. A Current Year’s Revenues Deflator Factor is used to adjust a railroad’s operating revenues to eliminate the effects of inflation. Deflator factors are based on the annual average Railroad Freight Price Index for all commodities as developed by the U.S. Department of Labor’s Bureau of Labor Statistics.

      • For example, in 2016 dollars, the scale is as follows (see Surface Transportation Board FY 2017 Annual Report):

        • Class I – $447,621,226 or more;

        • Class II – Less than $447,621,226 but
          more than $35,809,698; and

        • Class III – $35,809,698 or less.

  • Any person (including a Class I railroad (see below)) who transports property using the rail facilities of a Class II or Class III railroad.

    • "Rail facilities" of a Class II or Class III railroad are railroad yards, tracks, bridges, tunnels, wharves, docks, stations, and other related assets that are used in the transport of freight by a railroad and owned or leased by that railroad.

    • The taxpayer is only eligible to claim the credit for miles of eligible railroad track assigned to it by a Class II or Class III railroad for purposes of I.R.C. § 45G(b).​ See Form 8900 Instructions.

  • Any person (including a Class I railroad (see below)) who furnishes railroad-related services or property to a Class II or Class III railroad

    • "Railroad-related services" are services that are provided directly to, and are unique to, a railroad and that relate to railroad shipping, loading and unloading of railroad freight, or repairs of rail facilities or railroad-related property. For examples of what are and what are not railroad-related services, see Regulations section 1.45G-1(b)(8). See Form 8900 Instructions.

    • "Railroad-related property" is property that is provided directly to a Class II or Class III railroad and is unique to railroads. For a complete description, see Regulations section 1.45G-1(b)(7). See Form 8900 Instructions.

    • The taxpayer is only eligible to claim the credit for miles of eligible railroad track assigned to it by a Class II or Class III railroad for purposes of I.R.C. § 45G(b).​

  • "Class I railroads" include only the following seven entities (See Form 8900 Instructions):

    • BNSF,

    • CSX,

    • Grand Trunk Corporation (a holding company for all of Canadian National's U.S. railroad operations),

    • Kansas City Southern,

    • Norfolk Southern,

    • Soo Line (owned by Canadian Pacific), and

    • Union Pacific.

However, I.R.C. § 45G(b)(1) provides the credit allowed for any taxable year shall not exceed the product of $3,500, multiplied by the sum of—

  • the number of miles of railroad track owned or leased by the eligible taxpayer as of the close of the taxable year, and

  • the number of miles of railroad track assigned for purposes of this subsection to the eligible taxpayer by a Class II or Class III railroad which owns or leases such railroad track as of the close of the taxable year.

    • I.R.C. § 45G(b)(2) Assignments — With respect to any assignment of a mile of railroad track under I.R.C. § 45G(b)(1)(B)(ii)—

      • such assignment may be made only once per taxable year of the Class II or Class III railroad and shall be treated as made as of the close of such taxable year,

      • such mile may not be taken into account under this section by such railroad for such taxable year, and

      • such assignment shall be taken into account for the taxable year of the assignee which includes the date that such assignment is treated as effective.​

Who Must File

  • Eligible taxpayers use Form 8900 to claim the railroad track maintenance credit (RTMC) for qualified railroad track maintenance expenditures (QRTME) paid or incurred during the tax year. If you are an assignor of miles of eligible railroad track, you must file Form 8900 even if you do not claim any RTMC.

  • If you are an assignor with respect to miles of eligible railroad track, you must file Form 8900 even if you do not claim any RTMC.

  • Taxpayers, other than partnerships and S corporations, whose only source of this credit is from a partnership or S corporation, are not required to complete or file this form. Instead, they can report this credit directly on Form 3800.

Adjustments to Basis
Some or all of the QRTME paid or incurred by an eligible taxpayer may be required to be capitalized as a tangible asset or an intangible asset, if applicable. See Regulations section 1.45G-1(e)(1).
Use the amount of RTMC to reduce the basis of a qualifying railroad structure (including railroad track) asset or intangible asset, if applicable. The reduction is limited to the amount of QRTME capitalized for the asset. For further details, see Regulations section 1.45G-1(e)(2).

I.R.C. § 45G(e)(3) Basis Adjustment states if a credit is allowed with respect to any railroad track, the basis of such track shall be reduced by the amount of the credit so allowed.

Member of Controlled Group or Business Under Common Control
For purposes of figuring the credit, all members of a “controlled group of corporations” and all members of a “group of businesses under common control” are treated as a single taxpayer. See Regulations section 1.45G-1(f)(2) for a definition of these terms. As a member, your credit is determined on a proportionate basis to your share of the aggregate QRTME taken into account by the group for the RTMC. Enter your share of the credit as applicable on Form 8900. Attach a statement showing how your share of the credit was figured, and write “See Attached” next to the entry space as applicable on Form 8900.  

I.R.C. § 45G(e)(2) "Controlled Groups" states rules similar to the rules of paragraph (1) of section 41(f) shall apply.

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