Bonus Depreciation... One.....More.....Time

Aug 15, 2008

“Please, say it ain’t so Mr. Tax Man....ANOTHER twist to the bonus depreciation calculation!?” “Ahhhhh, yes my dear tax professional....ANOTHER twist....ANOTHER required calculation....AND....all the more reason for having that software maintenance contract paid up so that the current updates can be shipped and installed!”

Congress has passed, and the President has signed into law the Housing Assistance Tax Act of 2008. While the $15.1 billion in tax incentives are targeted principally to home ownership and affordable housing, the new law also allows corporations to use their accumulated alternative minimum tax (AMT) and research and development (R&D) credits by electing NOT to claim the special 50-percent bonus depreciation that was allowed by the recently enacted Economic Stimulus Act of 2008, which was an extension to the Jobs and Growth Tax Relief Reconciliation Act of 2003, which was a modification of the Job Creation and Worker Assistance Act of 2002, which modified the MACRS depreciation system, which………..Well, I think you get the picture.

Summary
The new law allows corporations to claim a portion of their pre-2006 AMT and R&D credits as a refund in lieu of claiming the special 50 percent bonus depreciation, if they acquire and place in service eligible qualified property acquired after March 31, 2008 and placed in service before January 1, 2009. If this election is made, the corporation may not claim bonus depreciation on the acquired property and must use the straight line method for computing both regular and AMT depreciation. The MACRS depreciation periods and conventions applicable to the acquired property are not affected.

Before we take a closer look at how your software will (or should) help you breeze through these calculations, allowing you and your clients to focus on the tax issue at hand, we will need to define some new terminologies.

New terms

Accelerated credit election – this is the election to claim a credit for a portion of the alternative minimum tax and research credits in lieu of the Code Sec. 168(k) bonus depreciation.
Accelerated credit – the portion of the unused AMT and R&D credits that are refundable in the current tax year.
Eligible qualified property – this is property that is acquired after March 31, 2008 and placed in service before January 1, 2009 and is eligible for the Code Sec. 168(k) bonus depreciation allowance. There are exceptions to the placed in service date for certain property with a long production period and certain noncommercial aircraft.
Bonus depreciation amount – this amount is 20-percent of the difference between (1) the aggregate amount of MACRS depreciation on eligible qualified property placed in service during the tax year if bonus depreciation applied to the eligible property and (2) the aggregate amount of depreciation that would be allowed on the eligible qualified property placed in service during the tax year if bonus depreciation did not apply.
Business credit increase amount – the unused R&D credits from tax years beginning before 2006.
AMT credit increase amount – the unused AMT credits from tax years beginning before 2006.
Maximum increase amount – this is the lesser of $30 million or 6-percent of the sum of the business credit increase amount and the AMT credit increase amount.
Bonus depreciation – the bonus depreciation that we have known and loved in the past.

Now that we are armed with the above knowledge and new terms, we are ready to unravel this newly created depreciation dilemma. First, let’s determine when an asset can be used as an eligible qualified asset with the following examples:

>>A calendar year corporation purchased a bonus asset on March 15, 2008 and places it in service on April 15, 2008. The asset is not eligible qualified property, since it was acquired prior to April 1, 2008.

>>A corporation with a 2007 fiscal year ending on May 31, 2008 acquires a bonus asset on April 1, 2008 and places it in service on June 1, 2008. It makes the accelerated credit election. The asset is eligible qualified property, since it was acquired after March 31, 2008 and placed in service before January 1, 2009. As an eligible qualified property, the asset must now use the MACRS straight-line method of depreciation for both regular and alternative minimum tax purposes to calculate its regular depreciation for the tax year.

>>The same corporation above wants to make the accelerated credit election and acquires assets in January 2008, May 2008 and June 2008.

>>>Those assets that are acquired in January 2008 and placed in service before January 1, 2009 are not eligible qualified property since they were acquired before April 1, 2008. Bonus depreciation may be claimed.

>>>Those assets that are acquired in May 2008 and placed in service before January 1, 2009 are eligible qualified property but bonus depreciation may not be claimed since they were acquired after March 31, 2008 and the accelerated credit election is made.

>>>For the June assets or any other assets acquired by the corporation in its new fiscal year starting on June 1, 2008, but before January 1, 2009, bonus depreciation may not be claimed since they are acquired after March 31, 2008, placed in service before January 1, 2009, and the accelerated credit election was made. Note that the calculations will span and be reportable on two separate tax returns - the first on its 2007 fiscal tax year return ending on May 31, 2008 and the subsequent 2008 fiscal tax year return ending on May 31, 2010.

Now let’s do some actual calculations.

>>>A calendar year corporation acquires an eligible qualified asset for $75,000 on May 1, 2008 and places it in service the same day. The property is 5-year MACRS property to which the half-year convention and the 200-percent declining balance method applies. Assume that the corporation has unused AMT and R&D pre-2006 credits of $750,000.

• First, bonus depreciation that could have been claimed for this asset is calculated as $37,500 (75,000 x 50%). Regular depreciation is calculated as $7,500 [(75,000 - 37,500) x .4) x .5]. The total depreciation that could have been claimed is $45,000.
• Second, depreciation that would have been claimed if bonus depreciation did not apply is $15,000 [(75,000 x .4) x .5].
• Third, the bonus depreciation amount, based on the new law, is $30,000 (45,000 minus 15,000).
• Since the $30,000 bonus depreciation amount does not exceed the 6-percent of the unused credits (750, 000 x .06 = 45,000), the corporation has a refundable credit of $30,000. If, on the other hand, the corporation only had $100,000 of pre-2006 credits, the bonus depreciation amount of $30,000 would be limited to a maximum of $6,000 (100,000 x .06). In addition to only having a refundable credit of $6,000, the entire asset would still be subject to the straight-line calculation.
• Finally, the regular current year depreciation allowed for the initial tax year is $7,500 [(75,000/5) x .5] – the MACRS straight-line method using a 5 year life and the half year convention.

Will all corporations need to go through these complex calculations? Generally speaking, the answer is no. The corporations that will benefit the most are those that have a bonus depreciation amount that is not limited by the 6-percent credit maximum and that derive no tax benefits by claiming bonus depreciation because its taxable income, without regard to those deductions, is zero or less.

Using software to answer questions like the example illustrated above is no longer a luxury. It is a necessity. As new laws are enacted, prior laws can become obsolete, be retroactive to certain dates, and be effective for prospective dates only, or any combination thereof. Reliable software has the ability to remember all of the rules, whether old or new, and apply them on a consistent and reliable basis.

When choosing your software, it is important to look beyond the software and behind the scenes at the people who are providing the software, in order to have confidence that the answers are correct, accurate, and in line with the level of service you require to maintain your professional practice.

Does your software provide you with this peace of mind, or will you be looking to change your profession?


About the author
Paul R. Pavich is the Director of Tax and Accounting for Red Moon Solutions LLC. He has over 30 years of experience in the field of taxation and accounting. Paul has been working in the software development business for the past eleven years.