Electing out of Bonus Depreciation per the 2008 Housing Act

By Nancy Faussett, CPA
Publication date: 07/01/2009

The Housing and Economic Recovery Act of 2008 allows corporations to forgo the bonus depreciation deduction and instead increase the credit limitations on both the Section 38 (c) General Business Credit for research expenditures and the Section 53(c) Alternative Minimum Tax credit. This provision of the Housing Act under IRS Code Section 168(k)(4) applies to corporations (and certain automotive partnerships) with tax years ending after March 31, 2008.

The provision has already necessitated two revenue procedures* (Rev. Proc 2008-65 and Rev. Proc 2009-16), which clarify the new rules and offer additional guidance.

*UPDATE: On July 20, 2009, the IRS is publishing yet another revenue procedure (Rev. Proc. 2009-33) on making the Section 168(k)(4) election, which modifies portions of these two earlier revenue procedures. See the end of this article for how to register for both a free Webinar on making the election and a free white paper containing the updated guidance.

Background

In effect, this Housing Act provision allows the taxpayer to claim a refundable credit for a portion of unused credits from tax years beginning before 2006 that pertain to its General Business research credit carryforward and/or its unused AMT credit. To take advantage of this provision, the taxpayer must make an election under Section 168(k)(4).

The research credit, under Section 38(c), is limited so as not to exceed the excess of the taxpayer's net income tax over the greater of:

• The taxpayer's tentative minimum tax for the year, or
• 25% of the taxpayer's net regular tax liability as exceeds $25,000.

Similarly, the AMT credit, according to Section 53(c), is limited so as not to exceed the excess of a taxpayer's regular tax liability over the taxpayer's tentative minimum tax for the year. Now with this election under Section 168(k)(4), the taxpayer can increase both of these limitations by the unclaimed bonus depreciation amount.

For the most part, only corporations can make the Section 168(k)(4) election. However, there are certain partnerships that may also claim it. To qualify, the partnership must:

• Be a domestic automotive partnership in effect on August 3, 2007, and
• Produce more than 675,000 automobiles during the period beginning January 1, 2008 through June 30, 2008.

Revenue Procedure 2008-65

Revenue Procedure 2008-65 clarifies which depreciable property qualifies for the election under Section 168(k)(4), explains some of the various required calculations, and discusses the effects of the making the election.

Note that the Revenue Procedure 2008-65 was issued before the American Recovery and Reinvestment Act of 2009 was passed. The 2009 Act extends the opportunity for making this election for one more year and extends the opportunity for claiming bonus depreciation for yet another year.

Eligible Property
Revenue Procedure 2008-65 explains that under Section 168(k)(4), the requirements as to which property qualifies for bonus depreciation under Section 168(k)(2) are changed as follows (I have updated the dates below according to the provisions included in the American Recovery and Reinvestment Act of 2009):

• The property must be placed in service after March 31, 2008,
• The property must be acquired after March 31, 2008 and before January 1, 2010 (or, for property having longer production periods and certain aircraft, before January 1, 2011*), but only if:
  • There was no written binding contract for acquiring it in effect before April 1, 2008 (note that this was changed by the American Recovery and Reinvestment Act of 2009, see below), or
  • It is acquired under a written binding contract that was in effect after March 31, 2008 and before January 1, 2010.

  *As explained below, the American Recovery and Reinvestment Act of 2009 provides that property having longer production periods can only qualify to the extent of adjusted basis attributable to manufacture, construction or production before Jan. 1, 2010 and after Mar. 31, 2008.

• If the property is manufactured, constructed, or produced by the taxpayer for the taxpayer's own use, such activity must be started after March 31, 2008 and before January 1, 2010, and
• If the new property is placed in service after March 31, 2008, and is then sold to the taxpayer and leased back to the seller by the taxpayer within three months of the seller's placed-in-service date, the taxpayer will be treated as the original user of the property. Furthermore, the property will be deemed new property originally placed in service by the taxpayer/lessor no earlier than the date on which the property is used by the seller/lessee under the lease.

And, finally, the Revenue Procedure 2008-65 states that the Section 168(k)(4) election does not apply to either reuse and recycling property placed in service after August 31, 2008 under Section 168(m) or to disaster assistance property placed in service after December 31, 2007 under Section 168(n). Both Sections 168(m) and 168(n) allow 50% expensing similar to the bonus depreciation deduction, but to which Section 168(k) does not apply.

Effect of the Section 168(k)(4) Election
Revenue Procedure 2008-65 explains that if a taxpayer wants to make this election under Section 168(k)(4), it must do so in its first taxable year ending after March 31, 2008, even if the taxpayer does not place any eligible property in service that year. By doing so, the taxpayer can apply the election to qualifying property placed in service in a later year.

Controlled groups of corporations, within the meaning of Section 52(a), are treated as one corporation for the Section 168(k)(4) election.

If a taxpayer makes a Section 168(k)(4) election, all assets must use the straight-line depreciation method.

Should the taxpayer make both the Section 168(k)(4) election and the election not to claim bonus depreciation for a particular class of property under Section 168(k)(2)(D)(iii), the latter election is applied first. So, for example, if a taxpayer makes an election to exclude all 5-year class property from bonus depreciation and also makes a Section 168(k)(4) election, all eligible property except for 5-year property will be included in the Section 168(k)(4) election. 

Once made, the Section 168(k)(4) election cannot be revoked without the written consent of the IRS. The taxpayer must request a letter ruling from the IRS for this purpose.

Bonus Depreciation Amount 
Revenue Procedure 2008-65 also clarifies how the bonus depreciation amount that may be used to accelerate the AMT and research credits is calculated.

The amount of bonus depreciation that may be used for this purpose is equal to 20% of the excess of:

• The depreciation that would be calculated on all eligible qualified property placed in service in the tax year if bonus depreciation applied to such property, and
• The depreciation that would be calculated on all eligible qualified property placed in service in the tax year if bonus depreciation did not apply to such property

The bonus depreciation amount calculated as above is, in turn, limited to the “maximum increase amount” less the total bonus depreciation taken in all preceding years. The “maximum increase amount” is the lesser of:

• $30 million, or
• 6% of the sum of the General Business Credit increase amount and the AMT credit increase amount.*

*The General Business Credit “increase amount” is that amount of the carryforward in the first tax year ending after March 31, 2008 that is derived from tax years beginning before January 1, 2006 and that is allocable to the research credit claimed under Section 41(a). The AMT “increase amount” is that amount of the minimum AMT credit under Section 53(b) for the first tax year ending after March 31, 2008 that is derived from the adjusted minimum tax for tax years beginning before January 1, 2006. To determine the AMT increase amount, treat the AMT credit as allowed on a first-in-first-out basis.

Allocation of Bonus Depreciation Amount 
The taxpayer must next determine the bonus depreciation amount to allocate to each of the research credit and the AMT credit limitations.

The bonus depreciation amount that can be allocated to the research credit limitation cannot exceed the excess of the of the General Business Credit “increase amount” (explained above) over the bonus depreciation amount allocated by the taxpayer to such limitation for all preceding tax years. Likewise, the bonus depreciation amount that can be allocated to the AMT credit limitation cannot exceed the excess of the AMT “increase amount” over the bonus depreciation amount allocated by the taxpayer to such limitation for all preceding tax years.

Revenue Procedure 2008-65 gives the following example:  Y, a calendar-year corporation, makes the Section 168(k)(4) election for its tax year ending December 31, 2008. Y has no bonus depreciation amounts for its preceding tax years. Assume that (1) Y's bonus depreciation amount is $100 million (i.e., this is the “bonus depreciation amount” that is calculated as explained above, and that may be used to accelerate the AMT and research credits), (2) Y's General Business Credit increase amount is calculated to be $10 million, and (3) Y's AMT credit increase amount is calculated to be $590 million. Consequently, Y's maximum increase amount is $30 million (the lesser of (1) $30 million and (2) .06 X ($10 million $590 million), or $36 million).  Therefore, Y's bonus depreciation amount that may be allocated to increase the credit limitations under Sections 38(c) and 53(c) is $30 million.  The portion of the $30 million bonus depreciation amount that Y allocates to the credit limitation under Section 38(c) is $10 million and the portion of the bonus depreciation amount that Y allocates to the credit limitation under Section 53(c) is $20 million.  During Y's next tax year ending December 31, 2009, Y places in service long production period property.  Y's 2008 Section 168(k)(4) election remains in effect.  For the 2009 taxable year, assume that (1) Y's bonus depreciation amount is $100 million and (2) Y's maximum increase amount is $30 million.  Therefore, Y's bonus depreciation amount for the 2009 tax year is $0 ($30 million maximum increase amount less the $30 million bonus depreciation amount that Y allocated to increase its Sections 38(c) and 53(c) credit limitations for 2008).

Revenue Procedure 2008-65 is effective October 10, 2008.

Revenue Procedure 2009-16

Revenue Procedure 2009-16 supplements Revenue Procedure 2008-65. Revenue Procedure 2009-16 explains how to make the Section 168(k)(4) election, how to allocate the credit limitation increases among members of a controlled group, how the election applies to automotive partnerships and S corporations, and the effect of the election on partnerships with corporate partners (although the latter will not be covered in this article). Revenue Procedure 2009-16 is effective January 23, 2009.

Time and Manner of Making the Section 168(k)(4) Election
The Section 168(k)(4) election must be made by the due date of the tax return (including extensions) for the taxpayer's first tax year ending after March 31, 2008. (See below for the changes to the election made by the American Recovery and Reinvestment Act of 2009.) The taxpayer should report the allocation amounts on IRS Forms 3800 and 8827. If, however, the taxpayer's first tax year ending after March 31, 2008, ended before December 31, 2008 (i.e., it has already been filed), then the allocation should be specified on an amended return.

If the C corporation's first tax year ending after March 31, 2008, ends on or after December 31, 2008, the Section 168(k)(4) election is made by:

• Claiming the refundable credit on line 32g of the 2008 Form 1120,
• Filing the 2008 Form 3800 or Form 8827, or both,
• Filing the 2008 Form 4562, Depreciation and Amortization, indicating that the taxpayer is using the straight line method, and
• If the C corporation is a partner in a partnership, notifying the partnership.

If the taxpayer is an S corporation, and the corporation's first tax year ending after March 31, 2008, ends on or after December 31, 2008, the Section 168(k)(4) election is made by:

• Claiming the adjustment on line 22b of the 2008 Form 1120S,
• Attaching a statement to the return indicating that the taxpayer is making the Section 168(k)(4) election and showing the computation of the increases to the research credit and AMT credit limitations,
• Filing the 2008 Form 4562 indicating that the taxpayer is using the straight line method, and
• If the S corporation is a partner in a partnership, notifying the partnership.

If the taxpayer's first tax year ending after March 31, 2008, ends on or after December 31, 2008, and the taxpayer did not place any eligible property in service during the year, the taxpayer makes the Section 168(k)(4) election by attaching a statement to that effect on a timely filed return.

There is an automatic extension of six months from the due date of the federal tax return (excluding extensions) for the first tax year ending after March 31, 2008, for making the Section 168(k)(4) election if the taxpayer's return was timely filed.

Effect of the Section 168(k)(4) Election on a Controlled Group
If all members of a controlled group file a consolidated return, the parent makes the Section 168(k)(4) election on behalf of all of the members, notifying them that the election has been made.

If a taxpayer, who is a member of a controlled group that makes the Section 168(k)(4) election, leaves the group in a later year, the election of the old group is not binding on the new group. However, whether or not the taxpayer is then a member of a different controlled group, the taxpayer must continue to use the straight-line method as if the election was made.

If a taxpayer becomes a member of a controlled group after the taxpayer makes the Section 168(k)(4) election, the election is not binding on the controlled group. Likewise, if a taxpayer becomes a member of a controlled group that has already made the Section 168(k)(4) election, the election does not apply to the taxpayer, unless the taxpayer was not in existence when the controlled group made the election. When the latter occurs, the Section 168(k)(4) election does apply to the new taxpayer.

Allocation of Bonus Depreciation Amount
When making the allocation between the research credit limitation and the AMT credit limitation, a different allocation may be used for different tax years.

If the parent corporation of a controlled group of corporations makes the Section 168(k)(4) election, the allocation of the group bonus depreciation amount is reported on Schedule O of the Form 1120 for that tax year. The group bonus depreciation amount is to be allocated among the members of the controlled group according to the rules set out in Section 1502.

While Revenue Procedure 2009-16 suggests a method of allocating the group bonus depreciation amount among members of a controlled group, any alternative method may be used as long as all of the members of the controlled group agree.

American Recovery and Reinvestment Act of 2009

At the time when the 2008 Housing Act was enacted, bonus depreciation was mainly allowed on qualifying 2008 assets (although it was allowed on certain 2009 assets as well). Now that the American Recovery and Reinvestment Act of 2009 has been passed, bonus depreciation has been extended for one year. Furthermore, the 2009 Act also extends the opportunity for making the Section 168(k)(4) election for one more year.

The 2009 Act provides that taxpayers who already made the Section 168(k)(4) election for their first tax year ending after March 31, 2008, to elect to have it not apply to extension property. “Extension property” is that property which would not have been included except for this new legislation (i.e., qualifying property placed in service, for the most part, in 2009, and property having a longer production period* and certain aircraft placed in service in 2010). If the taxpayer did not make the Section 168(k)(4) election for their first tax year ending after March 31, 2008, the taxpayer will be able to make the election for its first tax year ending after December 31, 2008.

*The Act states that property having a longer production period can qualify for the Dec. 31, 2010 placed-in-service deadline only to the extent of adjusted basis attributable to manufacture, construction or production before Jan. 1, 2010 and after Mar. 31, 2008.

Furthermore, the Act makes a technical correction for the purpose of defining eligible property for the election described above. The Act provides that there can be no written binding contract for the acquisition of eligible qualified property in effect before April 1, 2008.

Since this article was written, the IRS has published a new Revenue Procedure 2009-33, which gives further guidance on this election and modifies portions of Revenue Procedures 2008-65 and 2009-16.

Register now to view our free Webinar on making the Section 168(k)(4) Election. You can also register to receive our free white paper entitled "Electing out of Bonus Depreciation for Refundable Credits." The white paper includes Revenue Procedure 2009-33 and several examples as well.

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