IRS Issues Further Guidance on 50% First-Year Bonus Depreciation

The IRS issued Rev. Proc. 2009-16, which provides further guidance on how taxpayers can elect out of the bonus depreciation provision added by the Housing and Economic Recovery Act of 2008. The new revenue procedure supplements Rev. Proc. 2008-65.

Sec. 168(k)(4) allows corporations to elect out of claiming the 50% additional first-year depreciation for new property acquired after March 31, 2008, and placed in service before Jan. 1, 2009. Under this provision, corporations can elect to increase their business credit limitation under Sec. 38(c) (but only for certain research credits determined under Sec. 41(a)) or their alternative minimum tax (AMT) credit limitation under Sec. 53(c).

Rev. Proc. 2008-65 provided ordering rules for making the election out of bonus depreciation. (For more on this earlier revenue procedure, see “IRS Issues Guidance on Electing Out of 50% Additional First-Year Depreciation,” by Jack Donovan and Jane Rohrs.)

The new revenue procedure addresses the time and manner of making the election, the allocation of the credit limit increases among members of a controlled group, and how pass-through entities may be affected by the election.

Time and Manner

Under Rev. Proc. 2009-16, taxpayers must make the election by the due date (including extensions) of their federal tax return for their first tax year ending after March 31, 2008. (See Rev. Proc. 2009-16, §§ 3.01 and 3.04, for general filing instructions.) Taxpayers must make the election in that year—even if they did not place any eligible property in service during that year—to preserve the election for future years.

If a taxpayer’s first tax year to end after March 31, 2008, ended before Dec. 31, 2008, and the taxpayer has filed its 2008 return, that taxpayer should make the election on an amended return (Form 1120X, Amended U.S. Corporation Income Tax Return). A special rule applies, however, if the taxpayer did not place in service any eligible qualified property during the election year. (See Rev. Proc. 2009-16, §§ 3.02 and 3.03, for the deadline for making elections on an amended return and other special rules.)

The taxpayer will allocate amounts between the business credit limitation and the AMT credit by reporting the amounts on Form 3800, General Business Credit, and Form 8827, Credit for Prior Year Minimum Tax—Corporations.

Pass-Through Entities

Rev. Proc. 2009-16 clarifies the application of Sec. 168(k)(4) when an electing corporation is a partner in a partnership. The electing corporate partner must notify the partnership that the partner is making the Sec. 168(k)(4) election. The partnership is required to provide the partner with sufficient information so that it can compute its distributive share of depreciation on eligible qualified property placed in service by the partnership.

Rev. Proc. 2009-16 also provides guidance on how an S corporation can obtain a benefit under Sec. 168(k)(4) if it is subject to built-in gains tax and is also allowed a credit for research or AMT credit carryforwards that arose in a prior period when the entity was a C corporation.