Can an accrual-basis water utility deduct a reasonable amount for bad debts (uncollectible customer accounts) when computing its gross-earnings franchise tax under section 186 of the Tax Law, the way it can under the separate section 186-a utility gross-receipts tax?

Subject

Whether a reasonable amount for bad debts is allowed when computing taxable income under section 186 of the Tax Law.

Plain-English summary

Jamaica Water Supply Company, an accrual-basis taxpayer, pointed to a favorable rule under the separate section 186-a utility gross-receipts tax: a specific regulation there lets an accrual-basis utility deduct a reasonable amount for bad debts (uncollectible accounts), so its results come out "substantially, if not exactly," the same as if it used cash-basis accounting. The company argued the same logic should apply to section 186's older gross-earnings tax — since accrual accounting recognizes revenue when earned rather than when cash is actually collected, denying a bad-debt deduction there would effectively tax the company on revenue it never actually received.

The Department rejected the argument, tracing the statutory history: section 186 originally taxed "gross earnings from all sources," and an early 1906 court decision (Brooklyn Union Gas) read that to allow deducting the cost of raw materials. In 1907 the Legislature amended the statute to define "gross earnings" as "all receipts from the employment of capital without any deduction" — later interpreted by the Court of Appeals to mean the amendment intentionally broadened the tax base to include everything derived from the corporation's use of capital, without carve-outs. Section 186-a's bad-debt allowance comes from its own specific implementing regulation (20 NYCRR § 501.2) — there is no equivalent regulation, or comparable statutory language, under section 186. Because section 186 explicitly bars deductions in computing gross earnings, and no regulation creates a bad-debt exception the way § 501.2 does for section 186-a, the Department concluded Jamaica Water Supply may not deduct a reasonable amount for bad debts when computing its section 186 tax — even though the same company could deduct bad debts if it were instead subject to section 186-a.

What this means for you

Water, steam, and gas utilities subject to section 186

Don't assume the bad-debt deduction available under the parallel section 186-a utility tax also applies to section 186's gross earnings tax — it doesn't. Section 186's "without any deduction" language, confirmed by nearly a century of case law, forecloses a bad-debt allowance regardless of your accounting method.

Accrual-basis utilities weighing which tax regime applies to their income

If your utility income is subject to section 186 rather than section 186-a, expect to be taxed on billed/accrued revenue even for accounts that later prove uncollectible — there's no mechanism under section 186 to back that out, unlike the accrual-to-cash-equivalent adjustment section 186-a provides.

Accountants and tax professionals

The key doctrinal point: section 186-a's bad-debt deduction comes from a specific implementing regulation (20 NYCRR § 501.2), not from the statute itself — so don't assume a rule granted under one utility-tax section automatically carries over to a sibling section without its own textual or regulatory basis. Track the 1907 statutory amendment (adding "without any deduction" to section 186's gross earnings definition) as the textual anchor for this result.

Common questions

Q: Why does section 186-a allow a bad-debt deduction but section 186 doesn't?
A: Section 186-a has a specific implementing regulation (20 NYCRR § 501.2) creating the deduction to equalize accrual- and cash-basis results; section 186's own statutory text says gross earnings means all receipts "without any deduction," and there's no comparable regulation for it.

Q: Does this mean accrual-basis section 186 taxpayers are taxed on money they never collect?
A: Yes, potentially — uncollectible accrued receipts remain part of "gross earnings" under section 186 with no bad-debt offset.

Q: Can another water, steam, or gas utility rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 186 (franchise tax on water/steam/gas corporations, gross earnings "without any deduction")
• Tax Law § 186-a (tax on furnishing of utility services, gross income)
• 20 NYCRR § 501.2 (Tax on Furnishing of Utility Services Regulations, bad debt deduction for accrual-basis utilities under section 186-a)
• Referenced case law: People ex rel. Brooklyn Union Gas Co. v. Morgan, 114 App Div 266 (1906); People ex rel. Westchester Light Co. v. Gaus, 199 NY 147; Matter of Consolidated Edison v. Tax Commn., 24 NY2d 114

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a88_24c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (24)C
Corporation Tax
October 24, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C880726B

On July 26, 1988, a Petition for Advisory Opinion was received from Jamaica Water Supply
Company, 410 Lakeville Road, Lake Success, New York 11042.
The issue raised is whether a reasonable amount for bad debts is allowed when computing
taxable income under section 186 of the Tax Law.
Petitioner is an accrual basis taxpayer. Petitioner states that when computing gross income
under section 186-a of the Tax Law, an exclusion is allowed for a reasonable amount of bad debts.
Petitioner states that by allowing the exclusion for bad debts, an accrual basis taxpayer is achieving
the same results as would be attained by the cash system of accounting and reporting.
Petitioner contends that the intent of section 186 of the Tax Law is to tax receipts realized
and that in the case of an accrual basis taxpayer, the allowance for a reasonable amount of bad debts
is necessary in order that the taxes computed are based on revenue "received". In the absence of a
bad debt deduction, Petitioner contends that the taxes may be computed and paid on receipts not
realized. Petitioner believes that the term receipts, as used in section 186, was intended to mean
receipts received which would allow an accrual basis taxpayer an exclusion for bad debts.
When cash basis accounting is used, revenue is not recognized when the exchange transaction
occurs, but rather only when the cash is collected. Similarly, expenses are not recognized when they
are incurred as a result of an exchange transaction, but rather only when the cash payment is made.
Accrual basis accounting is specified by the revenue and matching principles. Under the revenue
principle, revenue is considered realized (i.e., earned), and is recognized in the accounts and reports,
in the period in which the transaction occurs, regardless of the periods in which the related cash is
collected. Similarly, under the matching principle, an expense is recognized, and matched with the
revenue of the period to which it relates, regardless of when the related cash is expended. (G.
Welsch, C. Zlatkovich, J. White, Intermediate Accounting, 33 (4th ed. 1976)).
The Tax on the Furnishing of Utility Services Regulations, promulgated pursuant to section
186-a of the Tax Law, specifically allow a deduction for bad debts when a taxpayer uses the accrual
method of accounting so that the results for such taxpayer would be substantially similar if not
exactly the same as a cash method taxpayer. Section 501.2 of such regulations provides that:
[a] utility keeping its accounts on the accrual basis shall include in gross income all receipts
accrued on its books for the reporting period, but will be permitted to deduct such sums as
represent, for example, uncollectible accounts, returned merchandise, etc., regardless of when
the sales were made or services rendered, thus achieving substantially, if not exactly, the

-2­
TSB-A-88 (24)C
Corporation Tax
October 24, 1988

same results as would be attained by the cash system of accounting and reporting.
Section 186 is distinguished from section 186-a in that section 186 does not attempt to
eliminate the differences in accounting for income resulting from the use by a taxpayer of the accrual
method versus the cash method of accounting.
Section 186 of the Tax Law imposes a franchise tax upon every corporation, joint-stock
company or association formed for or principally engaged in the business of supplying water, steam
or gas "for the privilege of exercising its corporate franchise or carrying on its business in such
corporate or organized capacity in this state". The tax imposed consists of two parts, a gross earnings
tax and an excess dividends tax. Only the earnings tax is pertinent to the issue raised herein.
In its original form, section 186 provided for a franchise tax upon various types of utility
companies measured by their "gross earnings from all sources within this state." In interpreting the
statute, the Appellate Division held in 1906 that in order to arrive at gross earnings, the cost of raw
materials used in producing the utility service had to be deducted from the company's gross receipts
(People ex rel. Brooklyn Union Gas Co. v. Morgan, 114 App Div 266). In 1907, the legislature
amended section 186 by adding the following definition: "The term 'gross earnings' as used in this
section means all receipts from the employment of capital without any deduction" (L 1907, ch 734,
S 3). Shortly thereafter, the Court of Appeals, construing the new amendment, found that its purpose
was "to enlarge the scope of the franchise tax by including all moneys that were received as products
of all uses of corporate capital, 'without any deduction'" (People ex rel. Westchester Light Co. v.
Gaus, 199 NY 147, 149). Almost sixty years later, the Court held that the amendment did not
contemplate a substitution of "gross receipts" for "gross earnings" as the basis for taxation; rather
it "merely sought to include [in gross earnings].., that portion of 'gross earnings' which represents
the 'employment of capital' to manufacture, distribute and sell various public utility services" (Matter
of Consolidated Edison v. Tax Commn., 24 NY2d 114, 119).
Section 186 specifically states that gross earnings means "all receipts from the employment
of capital without any deduction" (emphasis added). There are no regulations promulgated under
section 186. However, it is clear from the legislation and the decisions of the courts that it was not
the intent to allow a deduction for bad debts for taxpayers using the accrual method of accounting
when such taxpayers determine gross earnings under section 186.

-3­
TSB-A-88 (24)C
Corporation Tax
October 24, 1988

Accordingly, Petitioner may not deduct a reasonable amount for bad debts when computing
taxable income under section 186 of the Tax Law, even though a deduction for a reasonable amount
for bad debts is allowed under section 186-a of the Tax Law.

DATED: October 24, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.