Editor: Annette B. Smith, CPA
Credits Against Tax
Under the provisions of the American Taxpayer Relief Act of 2012, P.L. 112-240 (ATRA), corporations or consolidated groups with alternative minimum tax (AMT) credits from pre-2006 tax years may continue to accelerate the use of these credits instead of claiming the Sec. 168(k) additional bonus depreciation for eligible qualified property (EQP). To accelerate the use of these credits, an election must be made under Sec. 168(k)(4). This provision has proved particularly useful for companies with excess AMT credits that do not benefit from claiming bonus depreciation.
Forgoing Bonus Depreciation
The provisions of Sec. 168(k)(4) originally allowed a corporation with EQP placed in service after March 31, 2008, through Dec. 31, 2009, (original and extension property) to forgo its “bonus” depreciation and increase its general business credit and prior-year AMT limitations. This benefit was unavailable for 2010 (except for qualifying long-production-period property and certain aircraft) but was reinstated as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312 (the Act). The Act generally extended Sec. 168(k)(4) to qualified property placed in service in 2011 and 2012 (round 2 extension property). In addition, ATRA generally extends Sec. 168(k)(4) to qualified property placed in service in 2013 (round 3 extension property). The provisions for rounds 2 and 3 extension property allow the acceleration only of AMT credits, not for an increased general business credit, but otherwise are similar to the provisions for original and extension property.
A taxpayer may make two elections to forgo bonus depreciation under Sec. 168(k):
- The first election to forgo bonus depreciation is made under Sec. 168(k)(2)(D)(iii) on an entity-by-entity and class-by-class basis (e.g., all five-year property of one subsidiary in a consolidated group could be elected out of bonus depreciation).
- The second election to accelerate research credits or AMT credits in lieu of claiming bonus depreciation is made under Sec. 168(k)(4) and applies to all property of a controlled group of corporations (generally determined by greater-than-50% ownership) that meets the requirements of Sec. 168(k).
The IRS has provided that an election out of bonus depreciation under Sec. 168(k)(2)(D)(iii) is taken into account before an election to accelerate research credits or AMT credits under Sec. 168(k)(4). Thus, a taxpayer may control the property that is subject to its election to accelerate AMT credits through its Sec. 168(k)(2)(D)(iii) election to exclude property from the application of Sec. 168(k).
The amount of credits that can be refunded for each of original, extension, round 2 extension, and round 3 extension property (each Sec. 168(k)(4) period) is the lesser of (1) the base bonus depreciation amount (i.e., approximately 20% of the bonus depreciation forgone by the taxpayer); (2) 6% of the sum of the taxpayer’s unused and unexpired AMT credit carryforwards generated in tax years beginning before Jan. 1, 2006; or (3) $30 million.
Round 2 extension property treats 2011 and 2012 as one period. Thus, a taxpayer may accelerate a maximum of $30 million in AMT credits for this two-year period. However, a taxpayer may accelerate an additional $30 million for round 3 extension property, regardless of how many credits, if any, it previously accelerated under Sec. 168(k)(4). A taxpayer that elects to accelerate credits for all four Sec. 168(k)(4) periods may accelerate a maximum of $120 million in credits.
Time and Manner for Making an Election
Sec. 168(k)(4) provides different rules for (1) taxpayers that previously have elected to accelerate credits and (2) taxpayers that have not.
Previous election to accelerate credits: A taxpayer that previously elected to accelerate credits in lieu of bonus depreciation may choose whether to accelerate credits for a subsequent Sec. 168(k)(4) period. Taxpayers that previously elected to accelerate AMT credits are treated as having made an election to accelerate credits in a subsequent Sec. 168(k)(4) period.
A taxpayer that previously elected to accelerate credits but wishes to no longer accelerate the use of AMT credits must make an election not to accelerate these credits by the due date (including extensions) of its first federal income tax return for the year in which the taxpayer would be eligible to accelerate credits but no longer wishes to do so. The taxpayer makes the election by attaching a statement to the return for which the taxpayer elects not to apply Sec. 168(k)(4).
Thus, for example, a taxpayer that elected to accelerate general business credits or AMT credits for extension property may choose whether to accelerate AMT credits for round 2 extension property. Similarly, a taxpayer that elected to accelerate AMT credits for round 2 extension property may choose whether to accelerate AMT credits for round 3 extension property. This decision must have been made on the taxpayer’s timely filed return for the first tax year ending after Dec. 31, 2010, for round 2 extension property, and must be made on its timely filed return for the first tax year ending after Dec. 31, 2012, for round 3 extension property.
No previous election to accelerate credits: A taxpayer that has not previously elected to accelerate credits in lieu of bonus depreciation may elect to accelerate credits for each Sec. 168(k)(4) period. Once the election is made, it will apply to all subsequent Sec. 168(k)(4) periods until the taxpayer decides to elect out as noted above. For a taxpayer that has not previously elected to accelerate AMT credits that now wishes to do so for round 3 extension property, the election must be made by the due date (including extensions) of its federal income tax return for the first tax year ending after Dec. 31, 2012.
Taxpayers that would like to elect Sec. 168(k)(4) for round 2 extension property but did not previously elect to do so on or before the due date, including extensions, for the first tax year ending after Dec. 31, 2010, may request to make a late election under the relief provisions of Regs. Sec. 301.9100-3.
Manner of making the election and accelerating AMT credits: A taxpayer makes the election to accelerate AMT credits by (1) claiming the refundable credit on the appropriate line of Form 1120, U.S. Corporation Income Tax Return; (2) filing Form 8827, Credit for Prior Year Minimum Tax; and (3) filing Form 4562, Depreciation and Amortization, indicating that the taxpayer used straight-line depreciation and did not claim bonus depreciation.
Electing Corporate Partners
A corporate partner making a Sec. 168(k)(4) election must notify in writing any partnership in which the corporate partner owns a partnership interest before the election is filed with an original or amended return. Failure to notify the partnership nullifies the taxpayer’s attempted Sec. 168(k)(4) election.
A partnership that receives written notification from a corporate partner that made the Sec. 168(k)(4) election is required either to depreciate the corporate partner’s share of EQP using the straight-line method (and other relevant correlative adjustments) or to provide adequate information to the corporate partner to enable it to compute its distributive share of depreciation using the straight-line method.
A version of this item appeared in PWC’s WNTS Insight.
Annette Smith is a partner with PwC, Washington National Tax Services, in Washington, D.C.
For additional information about these items, contact Ms. Smith at 202-414-1048 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.