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

• Author: Arkin, Steven

Last year's efforts to stimulate the economy included the reenactment of 50% "bonus depreciation" under Sec. 168(k), generally for property placed in service during 2008. It did not take long, however, for companies representing a range of industries to lobby Congress for an alternative tax incentive because these cash-strapped businesses could not currently use the net operating losses (NOLs) generated by additional depreciation deductions.

In response, as part of the Housing and Economic Recovery Act of 2008, P.L. 110-289 (signed by the president on July 30, 2008), Congress enacted a special tax benefit under Sec. 168(k)(4) that allows corporations to claim a refundable tax credit in lieu of 50% bonus depreciation for certain capital investments made during the period April 1-December 31, 2008 (or during 2009 for certain long-lived and transportation property). As explained below, the method for calculating the new refundable credit under Sec. 168(k)(4) is complicated, and the procedural rules for electing the credit vary for taxpayers in different situations.

In essence, Sec. 168(k)(4) permits corporations in a loss position to capture the intended economic benefits of bonus depreciation by converting into cash a portion of their carryforward research credits and/or alternative minimum tax (AMT) credits. The "price" of electing this new refundable credit, however, is that the corporation must use straight-line depreciation for property that otherwise would be eligible for bonus and modified accelerated cost recovery system (MACRS) depreciation. Taxpayers and practitioners should also keep in mind that election of the refundable credit by one member of a controlled group could have significant tax consequences for other members of the same controlled group.

The new credit is provided indirectly through an increase in the credit utilization limitations described in Sec. 38(c) (relating to the general business credit) and Sec. 53(c) (relating to the AMT credit), with such increases treated as refundable overpayments of tax. (See Sec. 168(k)(4)(F) and Rev. Proc. 2008-65, [section] 2.04.) The credit amount computed under Sec. 168(k)(4) is the lowest of the following three amounts:

* The bonus depreciation amount, meaning 20% of the additional depreciation that the taxpayer would have been entitled to claim for the tax year as a result of applying Sec. 168(k)(1) to eligible qualified property placed in service between April 1 and December 31, 2008 (or in 2009 for certain property);

* 6% of the taxpayer's accumulated research credit carryforward amounts and AMT credits generated from tax years beginning before 2006; or

* $30 million.

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