Tax benefits for businesses available under the Economic Stimulus Act were trumped by those allowed in the Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law by President Bush on July 30, 2008. Companies electing to accelerate a portion of their unused pre-2006 research credits and alternative minimum tax credits may do so in lieu of claiming the 50% bonus depreciation allowance given in the stimulus legislation.

These accelerated credits will be refundable under this provision! This means that a tax refund is available even though no taxes have been paid. This provision can be beneficial to emerging companies that are not yet profitable but have significant research credit carryforwards and are making investments in property that otherwise would qualify for bonus depreciation.

Under the Economic Stimulus Act of 2008 (Pub. L. No. 110-185), enacted in February, businesses can take an additional first-year depreciation deduction equal to 50% of the adjusted basis of certain property generally purchased, placed in service, and originally used by the taxpayer in 2008.

This is known as “bonus depreciation.” The property eligible for bonus depreciation consists of property with an applicable recovery period of 20 years or less, water utility property, most computer software, and certain leasehold improvements. Some companies may be unable to take advantage of bonus depreciation and may have significant accumulated research credit carryfowards because they are currently in a loss position for tax purposes.

The New Provision

Corporations otherwise eligible for bonus deprecation may elect to claim additional research or AMT credits in lieu of bonus depreciation for “eligible qualified property.” Eligible qualified property generally consists of property that otherwise would qualify for bonus depreciation and that is purchased, placed in service, and originally used by the taxpayer after March 31, 2008, and before January 1, 2009.

In applying the new provision, the taxpayer can choose to allocate among research credit and AMT credits as desired; there is no forced allocation or ordering rule. The maximum benefit to a taxpayer under the new provision – what the statute calls the “maximum increase amount” – is limited to the lesser of (1) $30 million or (2) 6% of the taxpayer’s research credit and AMT credit carryovers attributable to tax years beginning before January 1, 2006.

If the election is made, the taxpayer has the potential to increase the amount of General Business Credit and Minimum Tax Credit it can claim in 2008. The amount of such credits is determined based on a multi-step formula. described below.

1.  First, the amount of the credits that can be claimed is limited to 6% of the taxpayer’s research credits and Alternative Minimum Tax (AMT) liability from tax years beginning in 2005 or earlier, and that have not previously been used.

2. Second, the use of these credits is limited to the amount of the taxpayer’s “bonus depreciation amount.” This is 20% of the amount of depreciation deductions (including bonus depreciation) that would be allowed for 2008 (without regard to the election), in excess of the depreciation deduction that would be allowed for the tax year if there were no bonus depreciation deduction for property acquired after March 31, 2008.

3. Third, the aggregate credit is limited to $30 million. The taxpayer would not be allowed a bonus depreciation deduction for its property acquired or self-constructed after March 31, 2008. Also, if the election is made, depreciation on this property must be computed using the straight-line method in computing taxable income.

Contact Associated Industries Member Kevin Cox or Steve Roark LeMaster Daniels with any questions (509.624.4315).