Business owners are faced with many decisions.  “How many employees should I hire?"  “Should I open another location?”  “Which supplier should I choose?"  Even when it comes time to file the annual tax return, there are decisions to be made. It is important for a business owner to be aware of the many elections that are available so that they are able to make educated choices that will produce the most favorable tax outcome.

One of the most common tax decisions business owners face annually is whether to make the election not to claim bonus depreciation on a class-by-class basis.  Bonus depreciation is available by default during the first year that qualified property is placed into service, and presents an opportunity to accelerate depreciation expense.  Currently, under the PATH Act of 2015, bonus depreciation is allowed 50% allowance through 2017, 40% in 2018, and 30% for 2019 before completely phasing out thereafter.  This is a great opportunity to acquire fixed assets, while also reducing taxable income.  Bonus depreciation can  reduce net income below zero, creating a net operating loss (NOL) that can be carried back two years or forward twenty years.

Why would a business elect not to claim bonus depreciation?  Perhaps the business is projecting growth over the next several years and expects to move into a higher tax bracket.  In this case it may be wiser to currently slow depreciation so that increased depreciation deductions are available in future years.  Another common reason would be if the business is already carrying forward NOLs from prior years.  Accelerating depreciation would only serve to increase those carryforwards.  If the business is unable to use those NOLs before they expire, the benefit of the deductions is lost.

Another strategy a corporation can employ is to accelerate Alternative Minimum Tax (AMT) credits in lieu of claiming bonus depreciation.  Corporations acquire AMT credits equal to the amount of AMT paid in prior years.  These credits can be used in future years against a corporation’s regular tax, however they are limited to the tentative minimum tax for the year.  This limitation prevents a corporation from utilizing AMT credits when the tentative minimum tax exceeds its regular tax.  AMT is often the result of timing differences, such as lower amounts of depreciation permitted in earlier years and increased amounts in later years.  The AMT credit provides an adjustment to the regular tax liability in future years when it exceeds the minimum tax.

Under IRC 168(k)(4), a corporation can elect to forgo all bonus depreciation and utilize the straight line method for the tax year.  In exchange, the corporation is permitted to increase its AMT credit limitation by 20% of the difference between the allowable amount of first-year depreciation if bonus depreciation was claimed over the allowable amount of first-year depreciation if bonus depreciation was not claimed.  In addition, this increase in the AMT credit limitation is a refundable credit.  Implementing this strategy will reduce the tax liability in a year when AMT is in effect.  In a year when no tax is due, the amount may be refunded.

This election has been available to corporations since 2008, but it was limited to the lesser of $30 million or 6% of AMT credits acquired prior to 2006.  In 2015, the PATH Act removed the $30 million limitation.  It increased the percentage allowed from 6% of credits earned prior to 2006, to 50% of credits earned prior to 2016.

For example, consider a corporation with $160,000 in AMT credits and large NOL carryforwards.  Assume for 2016 that the company is also in a net loss position.  The company places $1 million of qualified, 7-year property into service.  The allowable amount of first-year depreciation, when claiming bonus depreciation, would be $571,450 ($500,000 bonus plus $71,450 regular depreciation on the remaining $500,000) and without bonus depreciation would be $142,900.  Bonus depreciation would only serve to increase the NOLs and is of relatively little use to the corporation.  By making the election to accelerate AMT credits, the corporation would be able to receive $80,000 in refundable credits ($160,000 in AMT credits X 50% of the AMT credits earned before 2016).  This is calculated by taking 20% of the difference between qualified property first-year depreciation with bonus and qualified property first-year depreciation without bonus.  The credit would be $85,710 ($571,450 depreciation with bonus - $142,900 depreciation without bonus X 20%), however this amount is limited to 50% of the AMT credits earned before 2016.   The corporation would be able to carryforward the remaining $80,000 in AMT credits for use in future years.  In essence, this is a way for a corporation to turn AMT credit carryforwards into cash.