Recent legislation has created a better opportunity for businesses to monetize unused alternative minimum tax (AMT) credits. Taxpayers can now accelerate and make refundable up to 50% of their remaining pre-2016 AMT credits by electing to forgo bonus depreciation for property placed in service in 2016.
This change provides a much larger pool of potential credits than was available under previous law and could offer an excellent cash boost for companies with few opportunities to use past AMT credits.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 extended bonus depreciation at a 50% rate for property placed in service in 2016 and 2017. This allows taxpayers to deduct half the cost of eligible property in the year it is placed in service, with the rest depreciated using normal rules. Eligible property is generally property with a useful life of 20 or fewer years under the modified accelerated cost recovery system (MACRS), plus software, water utility property and qualified improvement property (previously qualified leasehold improvement property).
The bonus rate is currently scheduled to decline to 40% for property placed in service in 2018 and 30% for property placed in service in 2019, before disappearing in 2020. Certain long-production-period property, like airplanes, has later deadlines. Taxpayers can elect out of bonus depreciation on a class-by-class basis.
Election to accelerate AMT credit
Since bonus depreciation was resurrected in 2008, there has generally been an annual election available to forgo bonus depreciation in favor of accelerating a portion of AMT credits. The amount of bonus depreciation that can be converted into accelerated refundable AMT credits (before applying AMT-based limits) is 20% of the amount of additional first-year depreciation allowed by bonus depreciation. This calculation does not refer to the bonus depreciation amount itself, but is instead the difference between the total amount of first-year depreciation, including bonus depreciation, versus the total amount of first-year depreciation that would be allowed without bonus depreciation.
The depreciation calculations are based on MACRS depreciation even though the AMT election requires straight-line depreciation. For example, consider a taxpayer that places $100 of five-year property into service. The amount that can be deducted with bonus depreciation in the first year is $60, equal to $50 in bonus depreciation plus $10 (the 20% of $50 that is allowed in the first year using the MACRS half-year convention). The amount deducted without bonus depreciation in the first year is $20 (20% of $100). So the difference between the two is $40 (not the $50 bonus depreciation amount), and the amount that can be converted into accelerated AMT credits is $8 (20% of $40).
The election is annual and applies to all qualified bonus depreciation property placed in service in the year of the election.
The amount determined in the calculation above is further limited based on a percentage of a designated pool of AMT credits. Under prior law, taxpayers could accelerate only the lesser of $30 million or 6% of existing AMT credits that had been generated before 2006. The PATH Act removes the $30 million limit altogether and expands the pool and percentage of allowable AMT credits.
For tax years ending after Dec. 31, 2015, the limit is generally 50% of the balance in the AMT credit account as of the first taxable year ending after 2015, but cannot be more than the pre-2016 credits that have not been used previously as refundable credits. For fiscal tax years beginning in 2015 and ending in 2016, the percentage limit is a combination of the 6% rate and 50% rate based on the proportion of days in the fiscal year falling in calendar 2015 versus the number of days falling in calendar 2016.
The accelerated AMT credits are first used to reduce current-year tax liability, including minimum tax. Any excess is refundable. Unfortunately, to the extent a refund payment is attributable to a refund of prior-year minimum tax, then it is subject to payment reductions under the budget sequestration requirements of the Balanced Budget and Emergency Deficit Control Act of 1985. 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.
The new provision offers an excellent opportunity for immediate cash refunds, and can be especially helpful for those who are unlikely to exhaust AMT credits in the near future. But the sequestration will reduce refund payments, and bonus depreciation can also offer significant tax benefits. Taxpayers should calculate their returns with and without the election and assess the likelihood of using future AMT credits before making a decision.
Director, Washington National Tax Office
T +1 202 861 4144
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.