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Bonus Depreciation vs. Refundable Credits

Corporations can now elect to forego bonus depreciation in favor of refundable research and AMT credits. Here’s how.

September 11, 2008
by Mary Bernard, CPA/MST

Earlier this year, the Economic Stimulus Act of 2008 included a provision allowing businesses to claim a bonus first-year depreciation deduction of 50 percent of personal property that was acquired and placed in service during calendar year 2008. This economic stimulus incentive was originally introduced in 2002 in the aftermath of the September 11 terrorist attacks.

Property currently qualifying for this deduction includes:

  • Personal property with a recovery period of 20 years or less
  • Computer software not covered by code section 197
  • Qualified leasehold improvements
  • Water utility property

In order to qualify for this bonus depreciation, the property must be acquired and placed in service as the original use of the property during 2008. If all these requirements are met, bonus depreciation automatically applies to the property unless the taxpayer "elects out" as provided in section 168(k)(2)(C)(iii).

Although bonus depreciation can potentially amount to a substantial deduction, in the current economy many businesses are incurring losses and unable to take advantage of this incentive. Additionally, as no change was made to increase the two-year limitation on net operating loss carrybacks, businesses without sufficient income to realize an immediate benefit from the accelerated depreciation deduction might also not be able to recoup past taxes paid through carrybacks. As an alternative, the Housing Act would allow the company to claim refundable research and AMT credits otherwise limited by statute.

How Does the Election Work?

By making the election, the corporation foregoes the bonus depreciation and instead increases the limit on use of research credits (sec. 38(c)) and the limit on the use of minimum tax credits (sec. 53(c)). The increase in allowable credits is treated as refundable under the new law. Under this election, the qualified property is depreciated using straight-line method for both regular and AMT purposes.

The applicable credit limit is increased by the bonus depreciation amount. This bonus depreciation calculation, subject to a cap, is an amount equal to 20 percent of the excess of the following:

  1. the total depreciation, which would be allowed under section 168 for eligible qualified property placed in service during the tax year if the bonus depreciation provisions of section 168(k)(1) applied to all such property;
  2. the total depreciation, which would be allowed under section 168 for eligible qualified property placed in service during the year if the bonus depreciation provisions of 168(k)(1) did not apply to any property.

The depreciation calculations above are made without regard to an election to use 150 percent declining balance, straight line or alternative depreciation system.

The bonus depreciation calculation above is limited to the lesser of: 1) $30 million, or 2) six percent of the sum of research credit carryforwards from tax years beginning before January 1, 2006, and minimum tax credits allocable to the adjusted net minimum tax imposed during tax years beginning before January 1, 2006.

Additional Requirements

As determined by the Economic Stimulus Act, eligible property must be acquired and placed in service after December 31, 2007. However, in order to be eligible for the election to forego the bonus depreciation, the eligible property qualifies only if acquired and placed in service after March 31, 2008. The election under the Housing Act can only be made for the first tax year of the taxpayer ending after March 31, 2008.

There is an additional limitation applied to the amount available as increased credits. The bonus depreciation amount eligible for the election cannot exceed the above cap, $30 million or six percent of credits, reduced by the sum of bonus depreciation amounts for all preceding tax years. This provision most likely benefits fiscal year taxpayers.

The bonus depreciation amount subject to the election must be allocated between the research credits and the AMT credit. The amount added to increase the business credit tax liability is limited to the excess of the business credit increase amount over the bonus depreciation amount allocated to the business credit tax liability limit for all preceding tax years. The increase is equal to the portion allowable under section 38 for the first tax year ending after March 31, 2008 that is allocable to business credit carryforwards from tax years beginning before January 1, 2006 and is allocable to research credits under section 41(a).

Similarly, the portion allocated to the AMT credit tax liability limit is limited to the excess of the AMT credit increase over bonus depreciation amount allocated to the AMT credit tax liability limit for all preceding tax years. The AMT credit increase amount is equal to the portion of minimum tax credit under section 53(b) for the first tax year ending after March 31, 2008 by including only the adjusted net minimum tax for years beginning before January 1, 2006. Credits are allowed on a first in, first out basis for purposes of this calculation.

One final word of caution: once made, the election can only be revoked with the consent of the Internal Revenue Service.

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Mary F. Bernard
, CPA/MST is a Tax Principal and Director of State and Local Tax Services at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI. She has over 20 years of experience with national and local accounting firms working with a variety of individual, partnership and corporate clients, with particular focus on corporate multi-state tax issues. She has also provided advisory and compliance services to extensive nonprofit clients. Bernard is a member of the AICPA, the Massachusetts Society of CPAs and serves as President-elect of the board of directors for the Rhode Island Society of CPAs.