Financial Performance: Accounting, RINs and Margin Management

As I write this in April, margins are good and those who work in biofuels are reminded of good times from the past. I trust everyone still remembers what happened after the last period of “good times.” We must remind ourselves of those best practices learned and that we can’t become relaxed now but rather anticipate the next batch of hard times in order to be even more prepared for it.

In today’s environment it seems comical to talk about margin management. Risk management, production efficiencies and overall good business monitoring including revenue maximization and expense control should be followed just as diligently during times of large profits versus lean months of no income. Continuing to use the same metrics will afford you the opportunity to know quickly when something is outside the set parameters and allow you to take corrective action.

Let’s mention renewable identification numbers (RINs). Everyone’s got them but who wants them? RINs can be your best friend or your worst nightmare. At their best, they add value to every gallon of ethanol you produce and sell. At their worst they can lead to legal battles you don’t need or want.

It can, however, be easy to keep RINs from being a nightmare. Along with the proposed rules to govern RINs, there are several quality assurance programs (QAP) available to RIN generators, transmitters and buyers to help ensure what you are buying or selling is indeed real. Keep in mind participating in a voluntary QAP program can set you apart and make your RINs more valuable.

Margin management should always be important. For the most part, management doesn’t have to stress over generating a profit right now, it’s just happening. And though this is a breath of fresh air, acknowledging that things are good and that it’s an easy time to make money certainly doesn’t mean throwing good management practices out the window. Managers must run the business efficiently and make decisions as if you still had to work to make money. When margins do skinny up again, be prepared.

In early April, the Senate Finance Committee passed a tax extenders package with several provisions that, if left alone, would provide great benefits to the ethanol industry. These include extension of bonus depreciation, enhancements to the research and development credit, as well as extension of several biodiesel and renewable diesel credits. There is a long process yet to be completed before any of the provisions in the extenders package can be relied on. Other accounting changes on the horizon either in final or proposed form deal with revenue recognition, amortization of intangibles and accounting for leases.

The committee-approved package would retroactively extend tax credits for cellulosic biofuel and biodiesel for two years. The package also aims to extend more than 40 incentives that expired at the end of 2013, including the $1.01-per-gallon cellulosic biofuel tax credit, the $1-per-gallon biodiesel and renewable diesel tax credit and the 30 percent investment tax credit for alternative vehicle refueling property. It would also extend the 50 percent cellulosic biofuels bonus depreciation and 50-cent-per-gallon incentive for alternative fuel and alternative fuel mixtures, all through the end of 2015.

This sends a clear signal to the marketplace that Congress is making progress on extending its support for one of the most innovative, low-carbon industries in the world. These extenders send a signal to the advanced and cellulosic industry and to the markets regarding sustained support at the federal level with a two-year extension. At this time we do not know when the tax extenders package will be taken up by the full Senate.

Another somewhat recent and significant change in tax regulations deal with how to determine if an item is capitalized as a fixed asset or is expensed as a repair.  What used to be a simple analysis is now much more complicated and the answer changes depending at what point in the life cycle of the plant or component you are in when modifying or replacing equipment.

The bottom line is to be mindful of strategies that continue to keep your margins at their best, appreciate the natural income from RINs by utilizing a voluntary QAP program and be aware of tax extenders that could eventually be passed into law. And, let out that big sigh of relief for today’s ethanol industry.

Author: Donna Funk, CPA
Attorney, Kennedy and Coe LLP
800-303-3241
[email protected]