With all of the uncertainty surrounding tax reform, taxpayers should be evaluating strategies to put them in the best position to weather the storm. Under the Trump plan the tax rate proposed is 15%, a dramatic drop. His plan also proposes to eliminate AMT.
While a lower tax rate can be good for the bottom line it can also affect the value of deferred tax assets. For example, a $10 million NOL is worth $3.5 million in tax offsets. That same NOL is only worth $1.5 million in tax offsets under a 15% tax regime. Public companies need to write down the difference on their financials.
For many companies the bonus depreciation deduction can increase the NOL. If a taxpayer also has AMT credits, there is an opportunity to forgo bonus depreciation under Section 168(k)(4) and get a refundable AMT credit. The taxpayer can even go back 3 years and amend earlier tax returns to take advantage of Sec. 168(k)(4) to claim a refundable credit.
Making a Decision
So how do you decide whether it’s better to claim bonus depreciation or make the Sec. 168(k)(4) election to forgo it in favor of increasing the available credits? If you decide to make the election, you are giving up the benefits of claiming accelerated depreciation in order to claim increased credits. Some of what goes into the decision-making process is actually based on educated guess work. You should consider the following:
- Does the taxpayer have property eligible for bonus depreciation in the current year (or 3 prior years)?
- In what tax bracket does the taxpayer expect to be in future years?
In addition, you should prepare a present value analysis to compare the value of claiming accelerated depreciation (including bonus depreciation) versus only claiming straight-line depreciation. Then compare these two options with the benefit of claiming additional AMT credit now versus in the future.
Corporate Tax Analyzer™, from Bloomberg Tax, can help you with the complexities of this decision-making process. It has a worksheet to walk you through all of the calculations required when making the Sec. 168(k)(4) election. Following this worksheet can give you the confidence that nothing will be forgotten. The software will calculate the additional limit available for the AMT credit, including the allocation required for members of a controlled group. The software allows you to easily compare the effects of making or not making the election to forgo bonus depreciation by showing you the results of each choice in a side-by-side comparison. The program even takes much of the effort out of calculating the refundable minimum tax credit amount for Form 8827.