Newly Enacted PATH Act Increases Potential Refundable Credit for Corporations with AMT Credits

The newly enacted Protecting Americans from Tax Hikes of 2015 Act (PATH Act) extends the bonus depreciation provisions available to businesses and provides an expansion of the election to accelerate AMT credits in lieu of bonus depreciation. 

Significant Benefits Provided as Part of New Tax Depreciation Legislation

On December 18th, President Obama signed into law the Protecting Americans from Tax Hikes of 2015 Act (PATH Act), which addresses various tax extender provisions that expired during tax year 2015. Among the numerous business provisions, the PATH Act retroactively reinstates the bonus depreciation deduction for tax year 2015 and extends the provision through 2019 (with an additional year for certain property with a longer production period). The Act provides a bonus depreciation percentage of 50% for property placed in service during 2015, 2016 and 2017 and phases down the available bonus depreciation percentage, to 40% in 2018, and 30% in 2019. 

Qualified Improvement Property

The Act provides a permanent recovery period for qualified improvement property of 15-years beginning in 2016. This replaces prior temporary provisions for qualified leasehold, retail, and restaurant property. Improvements to the interior portion of a nonresidential building placed in service after the original placed-in-service date of the building receive a 15-year recovery period. The provision also allows bonus depreciation for qualified improvement property without regard to whether the improvements are property subject to a lease.

Election for Corporations to Claim AMT Credits in Lieu of Bonus Expanded

In addition, the provision significantly expands the ability of corporate taxpayers to elect to claim a refund of deferred AMT credits in lieu of bonus depreciation starting in 2016. A corporation can make an election to forego bonus and accelerated depreciation for eligible qualified property in exchange for a refundable credit of otherwise deferred AMT credits. A corporation that makes the election must forgo bonus depreciation and use the straight-line method for regular and AMT tax purposes with respect to the eligible qualified property.

For tax years beginning in 2016, the Act modifies the AMT rules to increase the potential amount of unused AMT credits that an eligible corporation can claim in lieu of bonus depreciation. Under the modified rules, the deferred AMT credits that a corporation can exchange for bonus and accelerated depreciation are attributable to tax years beginning before 2016.

The amount of pre-2016 AMT credits presently allowed for a tax year is increased by the bonus depreciation amount for the tax year. The bonus depreciation amount is equal to 20% of the difference between depreciation allowed for eligible qualified property if bonus depreciation was allowed and depreciation for eligible qualified property if no bonus depreciation was allowed. For example, if $6,250,000 of qualified five-year assets were placed in service in 2016, the bonus depreciation amount is $500,000. The bonus depreciation amount is computed as follows:

The bonus depreciation amount for a tax year is limited to 50% of the minimum tax credit for the first taxable year ending after December 31, 2015 (determined before application of any tax liability limitation), or the remaining minimum tax credit from taxable years ending before January 1, 2016 (whichever is less). 

All corporations treated as a single employer are treated as one taxpayer for purposes of the limitation as well as for making the election. In the case of a partnership having a single corporate partner owning more than 50% of the partnership, the corporate partner takes its share of the partnership’s eligible qualified property in computing its bonus depreciation amount. Income from underlying partnerships of an electing corporation must be determined based on straight-line depreciation for eligible qualified property and bonus depreciation does not apply.

As originally enacted, the bonus depreciation amount was limited to the lesser of $30 million or 6% of the minimum tax credits generated in taxable years before 2006. The removal of the $30 million cap and the increase in limitation from 6% to 50% of AMT credits generated prior to 2016 (versus 2006) presents an opportunity for taxpayers with pre-2016 AMT credit carryforwards to receive a refund if sufficient eligible qualified property is placed in service. 

The amount of eligible qualified property that must be placed in service to maximize the refund varies depending on the recovery period. On average, a taxpayer that places eligible qualified property in service with a cost that is six to seven times the amount of the taxpayer’s AMT credit carryforward in 2016 and 2017 will be able to use its entire AMT credit carryforward over a two-year period. 

The Takeaway

The legislation provides a level of certainty with respect to tax depreciation that has not existed for quite some time. The bonus depreciation deduction has recently been part of year-end extender packages, which have retroactively reinstated bonus depreciation and left taxpayers speculating on its availability from year to year. The five-year extension through tax year 2019 allows taxpayers to better plan for future capital expenditures.   

Corporations with AMT credit carryforwards should carefully evaluate potential benefits under the expanded AMT in lieu of electing bonus depreciation. The potential for refund of AMT credits may be an attractive option for many corporations with AMT credit carryforwards. Corporations should also consider how a potential 2016 election to claim deferred AMT credits in lieu of bonus depreciation would impact any valuation allowances against credit carryforwards for 2015 financial statement purposes.