Sec. 168(k) (4) - credit in lieu of bonus depreciation.

• Author: Brosseau, Alex

First enacted as part of the Housing and Economic Recovery Act of 2008, P.L. 110-289, and extended a first time by the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), the election under Sec. 168(k)(4) to claim a refundable tax credit in lieu of bonus depreciation has been extended again for certain property placed in service during 2011 and 2012 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. The election, originally contemplated as an alternative tax break for corporations in net operating loss positions, effectively allows corporations to accelerate and "monetize" a portion of their alternative minimum tax (AMT) credits in lieu of claiming bonus depreciation.

Although previous iterations of Sec. 168(k)(4) permitted corporations (but not other taxpayers) to monetize a portion of both carryforward AMT and research and experimentation (R&E) credits (see Arkin, "Sec. 168(k)(4) Credit in Lieu of Bonus Depreciation," 40 The Tax Adviser 142 (March 2009)), the latest extension allows corporations to monetize only a portion of their AMT credits. Further, ARRA had previously extended Sec. 168(k)(4) to cover extension property, generally meaning qualified property otherwise eligible for bonus depreciation if placed in service during calendar year 2009. Because the most recent extension of Sec. 168(k)(4) applies to property--referred to by the statute as "round 2 extension property"--placed in service in 2011 and 2012, it is important to note that corporations will not be able to make the election for property placed in service during 2010 (except for certain aircraft and longer production period and transportation property already subject to the taxpayer's previously made extension property election).

In addition, if a corporation has previously made the Sec. 168(k)(4) election (for instance, with respect to its extension property placed in service during 2009), it will be required to affirmatively elect out of the Sec. 168(k)(4) treatment if it wants to claim bonus depreciation (either 100% or 50% bonus) on its round 2 extension property. Absent such an election, corporations that previously made the Sec. 168(k)(4) election will be required to compute the allowable credit under Sec. 168(k)(4) and generally must use straight-line depreciation for their round 2 extension property placed in service during 2011 and 2012. A corporation that had not in the past made the...