The Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, modified and extended the opportunity for businesses to monetize unused alternative minimum tax (AMT) credits. Taxpayers are now allowed to accelerate and make refundable up to 50% of any remaining AMT credits generated before 2016 by electing to forgo bonus depreciation for eligible property placed in service during 2016.
The changes provided in the PATH Act allow a much larger pool of potential credits than had been previously available and could provide a cash boost to businesses that were unable to use past AMT credits.
Bonus Depreciation Extended
Bonus depreciation was extended by the PATH Act for property placed in service between Jan. 1, 2015, and Dec. 31, 2019 (Dec. 31, 2020, for certain longer-lived and transportation property). The bonus rate is scheduled to continue at 50% through Dec. 31, 2017, and then phase down to 40% in calendar year 2018 and 30% in calendar year 2019 before ultimately disappearing in 2020. Certain longer-lived property and transportation property have later deadlines for the phasedown of bonus rates. Taxpayers can elect out of bonus depreciation for any year on a class-by-class basis.
The extension of bonus depreciation allows taxpayers to accelerate recovery of the basis of property, by 50%, 40%, or 30%, in the year in which it is placed in service, with the remaining basis depreciated using normal rules. Property eligible for bonus depreciation is generally property with a recovery period or useful life of 20 years or less, computer software, water utility property, and qualified improvement property (a change beginning Jan. 1, 2016, from qualified leasehold improvement property).
Election to Accelerate AMT Credits
Since 2008, an election has generally been available to forgo bonus depreciation in favor of accelerating a portion of AMT credits. The portion of bonus depreciation that can be converted into accelerated AMT credits before any AMT-based limits is 20% of the excess additional first-year depreciation allowed by bonus depreciation over the depreciation allowed without regard to available bonus depreciation for eligible property. The amount that would be allowed without bonus depreciation is determined using modified accelerated cost recovery system (MACRS) rules, even though the election itself requires the use of the straight-line method in determining the current-year depreciation deduction for property to which the election applies.
Example: A taxpayer places into service $100 of five-year property that is otherwise eligible for bonus depreciation. The amount that would be deducted in the first year is $60, equal to $50 of bonus depreciation plus $10 of first-year depreciation on the remaining $50 of depreciable basis (MACRS depreciation using a five-year life and a half-year convention). The amount that would be deducted without bonus depreciation in the first year is $20 (using MACRS Table 1 from Rev. Proc. 87-57).So the excess additional first-year depreciation allowed by bonus depreciation is $40 (the difference between $60 and $20—not the available $50 of bonus depreciation), and the amount that can be converted into accelerated AMT credits is $8 (20% of $40).
This election applies to all property eligible for bonus depreciation that is placed in service in the year of the election and controls the depreciation method for all future years with respect to that property. Taxpayers can make the election annually with respect to property placed in service each year and are not bound by a prior-year election. This is different than under the prior law, where once an election was made, it applied to all property placed in service in the year of the election and property placed in service in future years.
Accelerated AMT credits are used first to reduce the current-year tax liability including minimum tax. Excess credits accelerated by this election are refundable. Unfortunately, to the extent a refund payment is attributable to a refund of prior-year minimum tax, it is subject to payment reductions under the budget sequestration requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, P.L. 99-177. The sequestration reduction rate for these refund payments processed from Oct. 1, 2016, through Sept. 30, 2017, will be 6.9% regardless of the period of the claim or when a return was received.
Tax Years Ending After Dec. 31, 2015
Prior to the PATH Act, the amount of accelerated AMT credits as calculated was limited to the lesser of $30 million or 6% of remaining AMT credits that were generated in tax years beginning before Jan. 1, 2006. The PATH Act removed the $30 million limitation previously imposed and expanded both the pool and the percentage of allowable AMT credits for tax years ending after Dec. 31, 2015.
The new limit is generally 50% of the remaining AMT credits for the first tax year ending after Dec. 31, 2015 (previously limited to credits generated in tax years beginning before Jan. 1, 2006), but cannot be more than the pre-2016 credits that have not been previously used as refundable credits.
For fiscal years beginning before Jan. 1, 2016, and ending after Dec. 31, 2015, a transitional effective date rule for implementing the percentage change was in place. The maximum limitation was equal to (1) the maximum increase amount before the changes in the PATH Act multiplied by the proportion of the fiscal year (in days) in calendar 2015, plus (2) the limitation imposed with the expanded rate multiplied by the proportion of the fiscal year (in days) in calendar 2016.
The election opportunity continues through 2019 (generally, unless the taxpayer has certain longer-lived and transportation property).
Round 5 Extension Property
Round 5 extension property is generally property placed in service after Dec. 31, 2014, and before Jan. 1, 2016. Taxpayers that elected to accelerate AMT credits related to round 5 extension property, prior to the PATH Act, are limited to the amount of accelerated AMT credits as calculated to the lesser of $30 million or 6% of remaining AMT credits that were generated in tax years beginning before Jan. 1, 2006.
Section 5 of Rev. Proc. 2016-48 provides the rules (by reference to Sections 4 and 6 of Rev. Proc. 2009-33, with substitutions) to either elect to accelerate AMT credits for round 5 extension property (if a taxpayer does not have an election in effect for round 4 extension property) or to elect not to accelerate AMT credits for round 5 property (if an election was previously in effect for round 4 extension property).
By removing the $30 million limitation, increasing the percentage limitation from 6% to 50%, and allowing pre-2016 AMT credit carryforwards to be accelerated (versus pre-2006 carryforwards), the PATH Act allows taxpayers to receive significant tax benefits. Considerations such as the forgone bonus depreciation, the sequestration of refund payments, and the likelihood the taxpayer will use AMT credits in the near future should be weighed against the benefits of making the election.
Greg Fairbanks is a tax managing director with Grant Thornton LLP in Washington.
For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.