On January 14, 2019, the IRS updated its announcement (the “IRS Announcement”), Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations to clarify that refundable alternative minimum tax (AMT) credits under Section 53(e) are not subject to sequestration for taxable years beginning after December 31, 2017.
AMT Credits and Bonus Depreciation
A taxpayer that paid AMT is eligible for an AMT credit under Section 53(b). The AMT credit is applied against regular tax liability in later years where the regular tax (subject to certain reductions) is higher than the tentative minimum tax. This credit can be carried forward indefinitely, but may not be carried back or used to offset future AMT liability.
Section 168(k), as amended by the 2017 tax reform known as the Tax Cuts and Jobs Act (TCJA), increased “bonus depreciation” from 50 percent to 100 percent expensing for both regular tax and AMT purposes. Full expensing is available for “qualified property” (generally, new property, or newly acquired used property, depreciated under MACRS with a recovery period of 20 years or less) acquired and placed into service after September 27, 2017, and before January 1, 2023. Starting in 2023, bonus depreciation phases down to 80 percent, then 60 percent in 2024, 40 percent in 2025, 20 percent in 2026, and 0 percent for property acquired and placed in service in 2027 and thereafter.
Under pre-TCJA Section 168(k)(4), for tax years beginning before January 1, 2018, corporations could elect to claim an increased AMT credit in lieu of bonus depreciation; the TCJA repealed this election.
Refundable AMT Credits
The TCJA repealed the AMT for corporations and added a provision – Section 53(e) – that treats as refundable all corporate AMT credits not used to reduce regular tax liability in tax years that begin before 2022.
As a result, the TCJA allows taxpayers with significant corporate AMT carryovers to use such credits by reducing or eliminating tax liability in the subsequent year or to obtain a tax refund to the extent that the AMT credit exceeds taxable income for the subsequent year. For tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryovers exceed regular tax liability, 50 percent of such excess AMT credit carryovers will be refundable. Any remaining credits will be fully refundable in 2021.
The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, imposes limitations on certain budgetary outlays (referred to as “sequestration”), including certain refundable tax credits that are recorded as outlays in the federal government’s budget, rather than a return of taxes previously paid by taxpayers. These types of credits are reduced by a sequestration rate before being refunded to taxpayers.
The Office of Management Budget (OMB), in its report for fiscal year 2019, determined a sequestration reduction rate of 6.2 percent. The IRS has confirmed that the 6.2 percent rate will apply to transactions processed on or after October 1, 2018, and on or before September 30, 2019.
The IRS Announcement reversed earlier announcements by stating that “for tax years beginning after December 31, 2017, refund payments and credit elect and refund offset transactions due to refundable minimum tax credits under Section 53(e) will not be subject to sequestration.”
This policy change applies only to Section 53(e) refundable AMT credits starting with the 2018 tax year, and does not change the IRS’s prior position for corporations making an election under Section 168(k)(4) and claiming a refund of prior year AMT credits for tax years beginning before January 1, 2018. Refunds/credits that result from corporations electing to claim an increased AMT credit in lieu of bonus depreciation under pre-TCJA Section 168(k)(4) are thus subject to sequestration.
The IRS Announcement further notes that corporations making the election under Section 168(k)(4) should use Form 8827, Credit for Prior Year Minimum Tax, to calculate the AMT credit incurred in prior tax years, the refundable AMT credit amount, and any minimum tax credit carryforward.
The recent IRS Announcement provides a favorable opportunity for corporations to receive the full amount of refundable prior-year AMT credits on their upcoming filings, without any sequestration reduction. For the 2018 tax year, AMT credits are first applied towards the regular tax liability (after nonrefundable credits are applied). Of the remaining AMT credit, 50 percent may then be claimed as a refundable credit, unrestricted by sequestration.
However, the IRS Announcement may require a re-evaluation of deferred tax assets (DTAs) recorded in a corporation’s financial statements for refundable AMT credits under Section 53(e). Based on earlier IRS announcements, companies might have concluded that the sequestration amount of DTAs relating to refundable AMT credits was not realizable, thus recording a partial allowance against AMT receivables in their financial statements for reporting periods ending prior to December 2018.
Rather than reversing such an allowance, taxpayers may want to consult with their tax advisers to see whether a position could be taken that sufficient evidence to support a removal of the valuation allowance was not available until the IRS Announcement was issued on January 14, 2019, such that the valuation allowance is not removed from the taxpayer’s financial statements until the annual or interim period including January 14, 2019.
If you have any questions, call the Crosslin tax team at (615) 320-5500. As always, thank you for your business!