Sec. 168(k)(4)—Credit in Lieu of Bonus Depreciation

Editor: Jon Almeras, J.D., LL.M.

Credits Against Tax

First enacted as part of the Housing and Economic Recovery Act of 2008, P.L. 110-289, and extended a first time by the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), the election under Sec. 168(k)(4) to claim a refundable tax credit in lieu of bonus depreciation has been extended again for certain property placed in service during 2011 and 2012 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. The election, originally contemplated as an alternative tax break for corporations in net operating loss positions, effectively allows corporations to accelerate and “monetize” a portion of their alternative minimum tax (AMT) credits in lieu of claiming bonus depreciation.

Although previous iterations of Sec. 168(k)(4) permitted corporations (but not other taxpayers) to monetize a portion of both carryforward AMT and research and experimentation (R&E) credits (see Arkin, “Sec. 168(k)(4) Credit in Lieu of Bonus Depreciation,” 40 The Tax Adviser 142 (March 2009)), the latest extension allows corporations to monetize only a portion of their AMT credits. Further, ARRA had previously extended Sec. 168(k)(4) to cover extension property, generally meaning qualified property otherwise eligible for bonus depreciation if placed in service during calendar year 2009. Because the most recent extension of Sec. 168(k)(4) applies to property—referred to by the statute as “round 2 extension property”—placed in service in 2011 and 2012, it is important to note that corporations will not be able to make the election for property placed in service during 2010 (except for certain aircraft and longer production period and transportation property already subject to the taxpayer’s previously made extension property election).

In addition, if a corporation has previously made the Sec. 168(k)(4) election (for instance, with respect to its extension property placed in service during 2009), it will be required to affirmatively elect out of the Sec. 168(k)(4) treatment if it wants to claim bonus depreciation (either 100% or 50% bonus) on its round 2 extension property. Absent such an election, corporations that previously made the Sec. 168(k)(4) election will be required to compute the allowable credit under Sec. 168(k)(4) and generally must use straight-line depreciation for their round 2 extension property placed in service during 2011 and 2012. A corporation that had not in the past made the Sec. 168(k)(4) election will be allowed to do so for its round 2 extension property, presumably by making the Sec. 168(k)(4) election on the corporation’s original return for its first tax year ending in 2011 (see Rev. Proc. 2009-33, which contained procedural rules for making the Sec. 168(k)(4) election for extension property placed in service during 2009).

By its operation, the election under Sec. 168(k)(4) for round 2 extension property increases the AMT credit utilization limitations of Sec. 53(c), effectively allowing a portion of “old” AMT credits (generated in tax years beginning prior to 2006) to be used to offset current-year regular tax and/or AMT liability otherwise owed by the taxpayer for 2011 and 2012 tax years. To the extent that the Sec. 168(k)(4) credit amount exceeds the taxpayer’s current-year regular tax and/or AMT liability, the credit is refundable (see Sec. 168(k)(4)(F)).

The Sec. 168(k)(4) credit is computed for the taxpayer’s round 2 extension property placed in service in both 2011 and 2012, without regard to whether the taxpayer made the Sec. 168(k)(4) election or instead claimed bonus depreciation for property placed in service prior to 2011. The credit is equal to the smallest of the three following amounts:

• 20% of the additional first-year depreciation that otherwise could have been claimed by applying Sec. 168(k)(1) to round 2 extension property (i.e., the bonus depreciation amount for round 2 extension property);
• 6% of the taxpayer’s accumulated AMT credits generated in tax years beginning before 2006 and available for the taxpayer’s first tax year ending after March 31, 2008; or
• $30 million.

The latter two amounts must be reduced by any Sec. 168(k)(4) credits claimed in previous tax years for round 2 extension property, thereby limiting a taxpayer’s maximum cumulative benefit available for all of its round 2 extension property (placed in service in multiple tax years) to $30 million or 6% of its pre-2006 accumulated AMT credits, whichever is less.

Calculating the Credit

The allowable Sec. 168(k)(4) credit for round 2 extension property is computed by reference to both the additional first-year depreciation that could have been deducted in the absence of the election and the taxpayer’s accumulated AMT credits from tax years beginning before 2006, and is then further limited by the $30 million cap.

Example: During 2011, T, a calendar-year taxpayer, places in service $20 million of eligible qualified property (defined below) with a five-year depreciable life and also makes the Sec. 168(k)(4) election in lieu of bonus depreciation for its round 2 extension property. Because the bonus depreciation percentage for qualified property placed in service during 2011 is 100% (under newly enacted Sec. 168(k)(5)), the first-year depreciation deduction otherwise allowed for T’s eligible qualified property placed in service during 2011 would be the full $20 million in the absence of the Sec. 168(k)(4) election.

By contrast, if bonus depreciation were not available, the first-year depreciation deduction allowed for the property would be $4 million ($20 million × 20%, using the MACRS 200% declining balance method). Thus, the bonus depreciation amount for purposes of computing the Sec. 168(k)(4) credit is $3.2 million (i.e., 20% of the additional first-year depreciation allowed due to bonus depreciation compared with the first-year depreciation deduction allowed under MACRS or, in this example, 20% × ($20 million – $4 million) = $3.2 million).

As a starting point, the taxpayer’s Sec. 168(k)(4) credit computed for 2011 would be the $3.2 million bonus depreciation amount unless this amount exceeds 6% of its accumulated AMT credits that were originally generated in tax years beginning before 2006 and that were available for the taxpayer’s first tax year ending after March 31, 2008. In other words, provided that the taxpayer had carryforward AMT credits from pre-2006 tax years of at least $53.3 million (6% of $53.3 million = $3.2 million), its Sec. 168(k)(4) refundable credit for 2011 would not be reduced below the $3.2 million bonus depreciation amount.

Continuing with the example, T’s Sec. 168(k)(4) credit for 2012 would initially be computed by reference to the bonus depreciation amount determined for its round 2 extension property placed in service during 2012, but T would be required to reduce both its 6% of accumulated AMT credit limitation and its $30 million cap by the $3.2 million credit claimed under Sec. 168(k)(4) for 2011.

Eligible Qualified Property

For Sec. 168(k)(4) purposes, “eligible qualified property” generally has the same meaning as “qualified property” for purposes of bonus depreciation—that is, MACRS property with a recovery period of 20 years or less, water utility property, qualified leasehold improvements, and certain computer software. In addition, round 2 extension property must be acquired (or self-construction must be considered to have begun by or on behalf of the taxpayer) after March 31, 2008, and placed in service after December 31, 2010, and before January 1, 2013 (or before January 1, 2014, in the case of certain aircraft and longer production period and transportation property).

Other Considerations

The IRS has issued guidance (Rev. Proc. 2009-16, which was updated and modified by Rev. Proc. 2009-33) containing the time and manner rules for making the Sec. 168(k)(4) election for property placed in service after March 31, 2008, but before January 1, 2010 (or before January 1, 2011, for certain longer production period and transportation property). It is anticipated that the IRS will issue similar guidance for making the Sec. 168(k)(4) election for round 2 extension property.

Taxpayers who have made the Sec. 168(k)(4) election pursuant to either its original enactment (during 2008) or its first extension (i.e., generally through 2009) should consider whether it is still economically worthwhile to forgo the benefits of bonus depreciation. This is because the election, as it applies to round 2 extension property, permits a taxpayer to claim a refundable credit for only a portion of its AMT credits and not its R&E credits (as in previous iterations of the provision). For certain taxpayers, this may significantly lower one of the limitations against which the bonus depreciation amount is compared, thereby reducing the allowable credit that can be claimed under Sec. 168(k)(4).

Further, corporate taxpayers that are members of a controlled group (generally determined by applying a more-than-50% ownership test (see Sec. 52(a)) are treated as a single taxpayer, such that the $30 million cap applies to the controlled group as a whole and a Sec. 168(k)(4) election made by one member generally will be binding on all other members of the controlled group (see Rev. Proc. 2009-16, Section 3.05, and Rev. Proc. 2009-33, Section 4.03, for additional information on Sec. 168(k)(4) in the context of a controlled group). In addition, special rules apply to corporations that are partners in a partnership (see Rev. Proc. 2009-33, Section 6.05(4)).

Conclusion

The election under Sec. 168(k)(4) to claim a refundable tax credit in lieu of bonus depreciation presents a unique opportunity for taxpayers in a net operating loss position to convert a tax deduction they presently do not need into a cash refund. Good candidates for this election are corporations with a large amount of accumulated AMT credits generated in tax years beginning before 2006 and for which a bonus depreciation deduction will not produce an immediate tax benefit due to being in a loss position without regard to the deduction.

EditorNotes

Jon Almeras is a tax manager with Deloitte Tax LLP in Washington, DC.

For additional information about these items, contact Mr. Almeras at (202) 758-1437 or jalmeras@deloitte.com.

Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.