Tax Legal Services · Primary-source case analysis

Idaho Power: Construction-Related Depreciation Must Be Capitalized

By Aneeta Mishra and Timothy Chan

Published September 13, 2026

Commissioner v. Idaho Power Co. explains how capitalization overrides a current depreciation deduction when business equipment is consumed in constructing a separate capital asset.

The utility used its own equipment for construction

Idaho Power used cars, trucks, and other equipment to build capital facilities. It claimed the full annual depreciation as a current deduction even though its regulatory books allocated the construction-related portion to the assets being built.

The construction use created a capital cost

Depreciation measures consumption of the equipment. When that consumption directly contributes to construction, it is as much a cost of the new facility as wages or materials and must be included in the asset’s basis.

The general deduction yielded to capitalization

Section 167 generally allows depreciation, but the Code makes deductions subject to section 263’s capitalization rule. Capitalization did not deny cost recovery; it matched recovery to the useful life of the facilities through later depreciation.

The Tax Court result was reversed

The Supreme Court reinstated the Commissioner’s treatment. The holding turns on the equipment’s construction use and does not require capitalization of depreciation attributable to ordinary operations unrelated to creating or improving capital assets.

Key takeaways

• Track how depreciable equipment is used during construction.
• Allocate construction-related depreciation to the new asset’s basis.
• Distinguish current operations from capital-asset creation.
• Recover capitalized cost through the rules governing the completed asset.