Giving Up Bonus Depreciation Can Result in Huge Corporate Tax Savings
Corporations should explore their options to determine whether the payoff will be greater by taking a credit or receiving bonus depreciation.
For many corporations giving up bonus depreciation seems counterintuitive. After all, they have relied on this valuable deduction as part of their tax strategy for many years. Some businesses may not be aware that the Protecting Americans from Tax Hikes (PATH) Act of 2015 made a major change to the special election that allows taxpayers to claim a refundable minimum tax credit, if they are willing to give up bonus depreciation. Up until 2015 only the minimum tax credit carryovers generated prior to 2006 were eligible for this credit.
But PATH introduced Section 168, which expanded the eligible minimum tax credit carryovers to all pre-2016 credits. The choice is whether to reduce income with bonus depreciation, or give up bonus depreciation and get a refundable credit. Even if you are in a loss position, you can still depreciate assets fully, just by using a longer schedule.
How much tax savings is at stake? Below is a simple example of how a company with $50 million in revenue and $500 million in deductions, including $500 million in bonus depreciation, could benefit. In Scenario 1 the company takes no refundable minimum tax resulting in no refund. In Scenario 2 the company takes a refundable minimum tax credit, and receives a $70 million refund.
Your company’s specific tax situation will dictate whether the payoff will be greater by taking the credit or by receiving bonus depreciation. In some cases, taking a loss versus receiving a refund is a prudent choice. This is where tax planning software such as Corporate Tax Analyzer™ is critical. At a minimum, corporations should explore their options so they can efficiently model various complex tax scenarios, eliminate surprises, and leverage the most beneficial tax treatments available to them.