Electing to Accelerate AMT and Research Credits in Lieu of Bonus Depreciation

Editor: Mark G. Cook, CPA, MBA

The Housing Assistance Tax Act of 2008, P.L. 110-289 (Housing Act), allows corporations to make an election to forgo bonus depreciation and instead claim an accelerated pre-2006 research and/or AMT credit. According to the act, if a corporation purchases and places in service qualified Sec. 168(k) bonus depreciation property after March 31, 2008, and before January 1, 2009 (January 1, 2010, for long production period property, transportation property, and certain aircraft), it may make an election under Sec. 168(k)(4) to not claim the 50% additional first-year bonus depreciation. Instead it may claim a refundable credit for a portion of its unexpired and unused research and/or AMT credit attributable to tax years beginning before January 1, 2006.

The American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), generally extends bonus depreciation for another year. Correspondingly, the Sec. 168(k)(4) election is also amended by ARRA and is extended to “extension property.” To clarify the implementation of these changes, the IRS issued Rev. Proc. 2009-33, which provides guidance on qualified property eligible for extension, time and manner requirements for making the election, and computation of the increased amount of research and AMT credits for taxpayers who did or did not elect accelerating credits prior to ARRA.

Extension Property

The Housing Act allows taxpayers to elect to accelerate AMT and research credits instead of taking bonus depreciation for new property that is (1) depreciable under a modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less, (2) MACRS water utility property, (3) off-the-shelf computer software depreciable over three years, or (4) qualified leasehold improvement property. The taxpayer must have purchased the property after March 31, 2008, and placed it in service before January 1, 2009. In the case of property having longer production periods, transportation property, and certain aircraft, the original use must begin before January 1, 2010.

ARRA generally extends the placedin- service date from January 1, 2009, to January 1, 2010 (and January 1, 2011, in the case of long production period property, transportation property, and certain aircraft). As a result, extension property, as defined by Sec. 168(k)(4)(H)(iii), is Sec. 168(k) property acquired after March 31, 2008, and placed in service during calendar year 2009 (2010 in the case of long production property, transportation property, and certain aircraft). The bonus depreciation amount, maximum increase amount, and maximum amount are calculated separately for eligible qualified property that is extension property and for eligible qualified property that is not extension property.

Bonus Depreciation Amounts, Maximum Increase Amounts, and Maximum Amounts

Under Rev. Proc. 2008-65, the bonus depreciation amount is 20% of the difference between:

• The aggregate amount of bonus and regular depreciation that would be allowable for eligible qualified property if the 50% additional first-year depreciation applied; and
• The aggregate amount of depreciation that would be allowable for eligible qualified property if the 50% additional first-year depreciation did not apply to all such property.

The bonus depreciation is limited to the maximum increase amount, which is the lesser of (1) $30 million or (2) 6% of the unexpired and unused pre-2006 research and AMT credit carryforwards to the current tax year. The bonus depreciation is further limited to the maximum amount, which is the maximum increase amount less the bonus depreciation amount claimed for all prior years.

Election Not to Apply Sec. 168(k)(4) to Extension Property

If a corporation has made the Sec. 168(k)(4) election for its first tax year ending after March 31, 2008, it may elect to not apply Sec. 168(k)(4) to extension property placed in service in its first tax year ending after December 31, 2008, and in any subsequent year. Even if the taxpayer does not have any extension property during its first tax year after December 31, 2008, the taxpayer must make the election to not apply Sec. 168(k)(4) to extension property if the taxpayer wishes to apply the election to extension property placed in service in subsequent years.

To make the election, the taxpayer must attach a statement indicating that it is making the election not to apply Sec. 168(k)(4) to extension property by the due date (including extension) of the federal income tax return for the taxpayer’s first tax year ending after December 31, 2008.

Rev. Proc. 2009-33

Rev. Proc. 2009-33 provides the following example to illustrate how the bonus depreciation amount, maximum increase amount, and maximum amount are calculated for extension property and for eligible qualified property that is not extension property.

Example: B Corp. is a calendar-year taxpayer. During 2008 and 2009, it purchases and places in service three properties: (1) property X, purchased and placed in service on August 1, 2008, with a cost of $50 million; (2) property Y, production of which begins on September 1, 2009, completed and placed in service on October 1, 2009, with a cost of $100 million; and (3) property Z, purchased and placed in service on August 1, 2009, with a cost of $50 million. B depreciates all the properties using the 200% declining balance method, a fiveyear recovery period, and the half-year convention. B files its original 2008 and 2009 tax returns on March 15, 2009 and 2010, respectively. B makes a Sec. 168(k)(4) election on its 2008 tax return and does not make the election not to apply Sec. 168(k)(4) to extension property on its 2009 tax return. As of December 31, 2008, B has $300 million in research and AMT credit carryforwards from tax years before 2006.

For B’s tax year ending December 31, 2008, X is eligible qualified property. As a result of the Sec. 168(k)(4) election, the bonus depreciation amount is 20% of $20 million, or $4 million. Because the $4 million is less than $30 million and 6% of B’s pre-2006 research and AMT credit carryover (6% × $300 million, or $18 million), B is not limited by the maximum increase amount. Therefore, B claims $4 million of refundable credits for its tax year ending December 31, 2008.

For tax year 2009, Y is eligible qualified property that is not extension property. As a result of B’s Sec. 168(k)(4) election, Y is taken into account in computing the bonus depreciation for this tax year. Z is extension property. Because B did not make the election not to apply Sec. 168(k)(4) to extension property, a separate bonus amount, maximum increase amount, and maximum amount are calculated for Z. The bonus depreciation amount for Y is 20% of $40 million, or $8 million. The maximum increase amount is $18 million (the lesser of $30 million or 6% of the $300 million pre-2006 research and AMT credit). The maximum amount is $14 million ($18 million less the $4 million of the prior year’s bonus depreciation for eligible qualified property that is not extension property).

Because $8 million is less than $14 million, B may claim $8 million of its refundable credit attributable to eligible qualified property that is not extension property for its 2009 tax year. The bonus depreciation amount for Z is 20% of $20 million, or $4 million. B’s maximum increase amount is $18 million. B’s maximum amount for extension property is $18 million. Because $4 million is less than $18 million, B may claim $4 million of refundable credits attributable to extension property for its 2009 tax year.

Conclusion

ARRA extends the election to accelerate research and AMT credits in lieu of bonus depreciation to extension property. If a corporation has extension property, it may consider whether to make an election to apply to its extension property. If a corporation has previously made such an election and does not elect not to apply the election to extension property, separate bonus depreciation, maximum, and maximum increase amounts should be computed and applied, both to eligible qualified property, which is extension property, and to eligible qualified property, which is not extension property, as explained in Rev. Proc. 2009-33.

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EditorNotes

Mark Cook is a partner at Singer Lewak LLP in Irvine, CA.

Unless otherwise noted, contributors are members of or associated with Singer Lewak LLP.The editor would like to offer a special thanks to Jennifer Allison, J.D., for her assistance with this column.

For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or mcook@singerlewak.com.