Consider Taking Advantage of AMT Relief on 2016 Asset Acquisitions
CLA has unearthed a detail in the Protecting Americans from Tax Hikes Act (PATH Act) that makes certain assets eligible for an Alternative Minimum Tax (AMT) exemption — even if you “elect out” of bonus depreciation.
This will be important in pass-through business entities where the business income flows to the 1040s of owners who are likely to be incurring AMT.
The provision is effective for new property placed in service in 2016 and after. Assets affected include machinery, equipment, and larger rolling stock such as tractor-trailer units. Depreciable software is also eligible for this unique situation.
Previous bonus depreciation and AMT provisions
Prior to 2016, when bonus depreciation was applied to an asset, the remaining 50 percent of the depreciable property was exempt from any AMT modification. But if you elected out of bonus depreciation prior to 2016, an AMT adjustment was required, measured as the excess of 200 percent declining balance (DB) depreciation over 150 percent DB depreciation. As a result, an election out of bonus forced a slower method of depreciation over the life of the asset.
The PATH Act amended Section 168(k) of the Internal Revenue Code and changed the “election out” rule. Effective for property placed in service after December 31, 2015, the AMT exemption continues to apply even if you elect out of bonus depreciation.
Qualified bonus depreciation property
Assets that are eligible for bonus depreciation and for which the AMT benefit applies include:
- New (i.e., original use) property and equipment with a 20-year or less depreciable recovery period
- Depreciable computer software
There are other bonus-eligible assets, such as cars and light trucks, certain building interior improvements, and farm machinery, but those assets may not use 200 percent DB and cannot benefit from this development.
The tax opportunity
In the past, in situations where business owners were incurring AMT and electing out of bonus depreciation, your tax advisor may have opted to use 150 percent DB depreciation rather than 200 percent DB. The reason was that if 200 percent DB accelerated depreciation was applied, the AMT adjustment generally negated any benefit in the owner’s individual tax returns.
But starting with asset additions placed in service in 2016, if an election out of bonus depreciation is made for one or more cost recovery categories, your tax preparer can safely use 200 percent DB without creating an AMT add-back. This will be important in pass-through business entities where the business income flows to the Forms 1040 of owners who are likely to be incurring AMT.
Possible amended corporate returns with fiscal years ending in 2016
Bonus depreciation rules apply based on the calendar year, not the taxpayer’s fiscal year. Thus, this revised AMT adjustment rule was available to a fiscal C corporation filing its corporate return for a period beginning in 2015 and ending in 2016, with respect to eligible bonus property placed in service after December 31, 2015 and for which an election-out was made.
If you filed a return that elected out of bonus depreciation and used 200 percent DB for regular tax, it is possible to amend the return to remove the AMT modification. Note that AMT only applies to larger corporations, defined as those with a three-year average gross receipts which exceeded $7.5 million. Most often, the corporations affected will be those with limited tax credits due to AMT.
How we can help
In view of the possibility of major tax reform in 2017 resulting in lower tax rates, depreciation deductions accelerated into 2016 that offset higher rates may be more valuable than deferrals into future years. In cases where it is necessary to elect out of bonus depreciation because the 50 percent deduction drives taxable income down too far, you can now consider the use of 200 percent DB method on those assets without creating or increasing AMT in current or future years. Your tax advisor can help you weigh all of these considerations as it applies to your situation.