Accelerated bonus depreciation
Accelerated depreciation allows businesses to write off most property costs – vehicles, equipment, etc. – faster than under modified accelerated cost recovery (MACRS). The idea is that businesses can recoup part of these costs more quickly, allowing them to make capital investments that boost the economy while freeing up cash flow for other requirements.
The tax code has different methods of accelerated depreciation. One popular method is bonus depreciation. Bonus depreciation lets businesses write off a portion of an asset’s cost in its first year of use. A company can currently write off 100% of qualified equipment costs in the year it placed its service. This percentage is scheduled to drop to 80% in 2023, 60% in 2024, and 40% in 2025, until its wholly phased out in 2027.
The IRA did not directly impact bonus depreciation. But it will impact accelerated depreciation deductions of large corporations via another aspect of the legislation: corporate AMT.
Corporate alternative minimum tax 2022
Congress introduced the corporate AMT in 1986 to prevent large companies from using tax exemptions to avoid paying income taxes, despite high earnings. Corporate AMT was eventually repealed by the Tax Cuts and Jobs Act of 2017.
The old version of the corporate AMT required companies to calculate their tax liability twice: once using the regular tax code and once using an alternative calculation without certain deductions. Then, the company paid whichever resulted in the highest tax bill.
The IRA of 2022 reintroduced the corporate AMT, but with major changes:
- It applies only to certain corporations (or a group of corporations treated as a single employer) with significant book-to-tax differences and a three-year average annual income over $1 billion from the prior three tax years.
- A company needs to pass the book income test only once to be subject to AMT. Unless the IRS specifies otherwise, it remains an applicable corporation.
- The new corporate AMT applies a 15% tax to a company’s adjusted financial statement income (AFSI). AFSI is a company’s net income or loss reported on it’s applicable financial statements (AFS), such as a Form 10-K filed with the SEC, including tax and accounting adjustments. Accelerated depreciation is a tax adjustment (but not for book purposes).
- This aspect of the corporate AMT could substantially cut the minimum tax bill of corporations that invest heavily in the next few years. However, it will have less impact as bonus depreciation phases out unless Congress decides to extend it.
- The IRA either created or reinstated green energy tax credits. Combined with the AMT, these credits will affect corporations’ decisions about bonus depreciation.
Bonus or no bonus
Depreciation can factor into both regular and AMT tax calculations for corporations.
Say a corporation wants to claim the renewable electricity production tax credit (PTC) before it expires at the end of 2024. However, the company must have tax liability in order to take advantage of the tax credit. In that case, the organization may want to forgo bonus depreciation, increase taxable income, and use the expiring credit.
However, because calculations for the corporate AMT allow the company to use accelerated depreciation when determining AFSI, claiming that tax credit for regular tax purposes could result in a higher tax bill under AMT calculations. This creates several moving pieces and requires multiple calculations for the best course of action.
