Revenue Procedure 2008-65 Clarifies Opportunity for Corporate Taxpayers to Cash in on Unused Credits

In February 2008, Congress enacted the Economic Stimulus Act of 2008,¹ which, among other things, amended Section 168(k) of the Internal Revenue Code² to allow taxpayers to take an additional 50 percent first-year depreciation deduction for certain new property acquired after 2007 and placed in service before January 1, 2009, depending on the type of property.³ On July 20, 2008, Congress further amended Section 168(k) in the Housing and Economic Recovery Act of 2008⁴ by adding Section 168(k)(4), which allows corporate taxpayers to forgo the depreciation deduction and increase the amount of business credits and alternative minimum tax (AMT) credits they may use.

On October 10, the IRS released Revenue Procedure 2008-65,⁵ providing guidance for taxpayers on the amendments to Section 168(k) made in the Housing and Economic Recovery Act. Under amended Section 168(k)(4) corporate taxpayers who qualify for the additional depreciation deduction may elect instead to increase their limit on their use of carry forwards of business AMT credits earned in tax years beginning before January 1, 2006. This credit limit increase applies to the corporation’s first tax year ending after March 31, 2008, and to all subsequent tax years in which the corporation forgoes the additional first-year depreciation.

Revenue Procedure 2008-65 clarifies the rules on the effect of making this election, as well as what property qualifies for the treatment and how to properly calculate the increase of the business credit and AMT credit limitations. Some notable points include:

• the additional first-year depreciation applies to qualified property acquired after December 31, 2007, however, the Section 168(k)(4) election is available only if the property is acquired after March 31, 2008
• the Section 168(k)(4) election does not apply to certain recycling equipment and disaster relief property qualified for the additional 50 percent first-year depreciation deduction in Sections 168(m) and 168(n)
• the total amount of the credit increase is limited to 6 percent of the taxpayer’s business and AMT credit carry forward from tax years beginning before 2006, up to $30 million total. However, in no case can the increase be more than 20 percent of the amount the taxpayer could have claimed in bonus first-year depreciation.

The Revenue Procedure states that the IRS intends to publish separate guidance on the time and manner of making the election.

Pepper Perspective

Under the rules spelled out in Revenue Procedure 2008-65, calculating a corporation’s benefit under these provisions can be complex. However, making the calculation may be worth the effort, given the current economic climate, and because many corporate taxpayers are likely going to be AMT taxpayers in the current year. Thus, for many companies likely to have loss years, Congress has given taxpayers a great opportunity to monetize some of their unused credits.

Endnotes

1 Pub. L. No. 110-185, 122 Stat. 613 (Feb. 13, 2008).

2 Unless otherwise stated, all references to “Section” are to the Internal Revenue Code of 1986 (the Code).

3 Certain property listed in Section 168(k)(2) may have a placed in service date of January 1, 2010.

4 Pub. L. No. 110-289, 122 Stat. 2654 (July 20, 2008).

5 2008-44 I.R.B.