Corporate taxpayers subject to the alternative minimum tax (AMT) can elect to forgo first-year bonus depreciation in exchange for using AMT credit carryovers (AMT credit election). Although the AMT credit election has been around for a number of years, its availability previously was limited to AMT credits originating in years prior to 2006. The Protecting Americans From Tax Hikes Act of 2015 (PATH Act) modified the AMT credit election for the 2016 tax year and now allows the election to be made for any credit carryover originating from AMT paid for 2015 or earlier tax year. Special rules apply to fiscal year taxpayers for their year ending in 2016. Taxpayers who make the annual AMT credit election can claim only straight-line depreciation – and no bonus depreciation – for assets that otherwise were eligible for bonus depreciation. Amounts claimed using the AMT credit election are refundable even if the taxpayer has no regular tax liability or is paying AMT in the current year.
As an example, assume a corporation has an AMT credit carryforward to 2016 of $15 million. The corporation’s calendar year 2016 regular tax liability is $0, but its AMT liability is $2 million without using this election. During 2016, the corporation placed in service $1 million of fixed assets that are eligible for bonus depreciation.
First, the corporation will need to compute the maximum amount of AMT credit carryforward available for the election. In this example, that amount is $7.5 million, which is the lesser of:
- 50 percent of the minimum tax credit for the first tax year ending after Dec. 31, 2015 ($15 million x 50 percent)
- The minimum tax credit taking into account only minimum tax credit carryovers allocable to tax years ending on or before Dec. 31, 2015 ($15 million)
Second, the corporation needs to compute the amount of bonus depreciation in excess of ordinary accelerated depreciation, which is $400,000. That amount is computed as:
The allowable amount of bonus depreciation and accelerated depreciation, which is $600,000 ($1 million asset basis x 50 percent bonus depreciation allowed in 2016 = $500,000, plus 20 percent accelerated depreciation x remaining basis of $500,000 = $100,000)
The amount of accelerated depreciation that would be allowed if no bonus depreciation were allowed, which is $200,000 ($1 million asset basis x 20 percent accelerated depreciation rate)
Finally, the taxpayer computes the allowable credit as $80,000, which is the lesser of:
- $7.5 million from the first step
- 20 percent of the amount computed in the second step (20 percent x $400,000)
A worksheet for computing the allowable minimum tax credit is available in Form 8827, “Credit for Prior Year Minimum Tax – Corporations.”
Because sequestration is still in place, the IRS has indicated it will reduce the amount of any refundable minimum tax credit processed between Oct. 1, 2016, and Sept. 30, 2017, by 6.9 percent. That reduction is permanently lost to the corporation. The reduction applies only to amounts that are refundable; credits used to reduce regular or AMT tax liability are not subject to sequestration.