Guidance Unveiled on Depreciation Substitute Election in 2008 Act

Rev. Proc. 2009-16, 2009-6 I.R.B. __: IRS supplements previously-issued guidance on §168(k)(4) election to increase business credit limitation and AMT credit limitation in lieu of claiming bonus depreciation.

The IRS provides guidance on the time and manner for making the §168(k)(4) election (Rev. Proc. 2009-16, §3), the allocation of the credit limitation increases under §§38(c) and 53(c) among members of a controlled group (Rev. Proc. 2009-16, §4), the effect of the election on partnerships with corporate partners that make the §168(k)(4) election (Rev. Proc. 2009-16, §5), the application of §168(k)(4) to S corporations (Rev. Proc. 2009-16, §6), and the election under §3081(b) of the Housing and Economic Recovery Act of 2008 (P.L. 110-289) by certain automotive partnerships to be treated as making a refundable deemed payment of income tax (Rev. Proc. 2009-16, §7). The revenue procedure supplements Rev. Proc. 2008-65, 2008-44 I.R.B. 1082.

In general, a corporate taxpayer must make the §168(k)(4) election by the due date (including extensions) of the federal income tax return for the taxpayer's first taxable year ending after March 31, 2008, even if the taxpayer does not place in service any eligible qualified property during its first taxable year ending after March 31, 2008, the IRS clarified.

The guidance outlines making the election for controlled groups, consolidated groups, new taxpayers, and overlapping groups, as well as limited relief for late elections.

The IRS added that failure to comply with any of the reporting or notification requirements set forth in the guidance will nullify an attempted §168(k)(4) election.

The guidance provides that a taxpayer allocates the bonus depreciation amount between the business credit limitation and the AMT credit limitation by the due date (including extensions) of the taxpayer's federal income tax return for the taxable year, and that, in general, the taxpayer specifies this allocation by reporting the amounts on the appropriate lines of the Forms 3800 and 8827.

However, if a taxpayer's first taxable year ending after March 31, 2008, ends before December 31, 2008, the taxpayer makes and specifies the allocation for such taxable year on its amended federal income tax return.

The allocation of the group bonus depreciation amount for any taxable year is reported on Schedule O (Form 1120) (or a similar statement) attached to the federal income tax return or amended federal income tax return for that taxable year filed by each member of the controlled group. However, if a member of a controlled group does not have the information necessary to allocate the group bonus depreciation amount for a taxable year on or before the due date (including extensions) of the member's federal income tax return for the taxable year, the member must make and specify the allocation for that taxable year on an amended federal income tax return for that taxable year that is filed on or before the due date (including extensions) of the member's federal income tax return for the succeeding taxable year, the IRS stated.

In general, if a corporation making the election is a partner in a partnership (electing corporate partner), the partnership must provide the electing corporate partner with sufficient information to apply §168(k)(4)(G)(ii) in determining its distributive share of partnership items under §702 relating to any eligible qualified property placed in service by the partnership during the taxable year. This information must be provided in the time and manner required by §6031(b) and Regs. §1.6031(b)-1T(a)(3)(ii) and (b). If the partnership has filed its federal tax return for its first taxable year ending after March 31, 2008, on or before February 9, 2009, and did not provide the electing corporate partner with sufficient information to apply §168(k)(4)(G)(ii), the partnership must provide such information to the electing corporate partner by the later of May 11, 2009, or 90 calendar days after receiving the corporate partner's notification, the IRS stated.

The IRS noted that an S corporation is allowed to make the §168(k)(4) election, but that any resulting business or AMT credit limitation increases are applied at the corporate level only. Furthermore, if the election is made, an S corporation may not claim business credits or AMT credits in excess of its §1374(a) tax for the taxable year. Any credits allowed as a result of the increase in the business or AMT credit limitations, which may be used only as an additional credit against the §1374(a) tax, are not refundable to the S corporation, the IRS stated.

According to the IRS, an applicable partnership must make the election under §3081(b) of the Housing Act by the due date (including extensions) of the Form 1065, U.S. Return of Partnership Income, for the partnership's first taxable year ending after March 31, 2008, even if an applicable partnership does not place in service any eligible qualified property during its first taxable year ending after March 31, 2008. The §3081(b) Housing Act election is made by making the following statement on a timely-filed Form 1065 for the first taxable year ending after March 31, 2008, in the space below the signature section of the Form 1065: “A refund in the amount of $[Dollar Amount] is requested pursuant to Section 3081(b)(1) of P.L. 110-289, the Housing and Economic Recovery Act of 2008.” The guidance provides limited relief for late elections. The IRS cautioned that, for the taxable year in which the §3081(b) Housing Act election is made and for any subsequent taxable year in which an applicable partnership is claiming a refundable deemed payment under §3081(b) of the Housing Act, the partnership's Form 1065 and related forms and schedules (including Schedules K-1) must not be filed electronically.

Rev. Proc. 2009-16 is effective January 23, 2009, and is scheduled to be published in Internal Revenue Bulletin 2009-6, dated February 9, 2009.