By Ann Donie, Senior Design Analyst

IRS Issues Guidance on AMT Adjustment for Special Depreciation Allowance Qualifying Property

On April 24, 2002, the IRS posted revised instructions for the 2001 Form 4626, Alternative Minimum Tax -- Corporations, to their web site (www.irs.gov). These instructions clarify how the Job Creation and Worker Assistance Act of 2002 affects AMT calculations.

The instructions state, "No alternative minimum tax (AMT) adjustment is required for any property that qualifies for the special allowance." The instructions go on to explain that the 30% special depreciation allowance is deductible for the AMT and there also is "no adjustment for any depreciation figured on the remaining basis of the property." However, if the taxpayer has elected to NOT have the special allowance apply to a class of property for a tax year, then such property is not qualified property and any normal AMT adjustment would be required.

This eliminates the previous uncertainty surrounding section 168(k)(2)(F) of the Internal Revenue Code, which addresses the AMT calculation in regards to the special depreciation allowance. The one-sentence section was interpreted by some to mean that no adjustment is made to the 30% allowance for AMT purposes, however the remaining basis is depreciable under the existing AMT rules, and therefore the AMT adjustment applies to the remaining basis. Others interpreted the section to mean that no AMT adjustment is made for either the 30% allowance or regular depreciation for assets that qualify for the special allowance.

The Form 4526 instructions also note that if the above change affects a corporation’s AMT liability for its tax year ending in 2001 or 2002, and the corporation has already filed its tax return, it must file an amended return.

Background

The "Job Creation and Worker Assistance Act of 2002", which provides for a 30% special depreciation allowance on qualifying property along with other favorable tax treatments, has been law since President Bush signed the bill on March 9, 2002. On March 19, 2002, the IRS posted a revised 2001 Form 4562, Depreciation and Amortization, and instructions on their web site.

The 30% depreciation allowance covers property acquired on or after September 11, 2001 -- this is a bit surprising because other 2002 stimulus proposals covered property acquired after 12/31/01. Taxpayers are eligible for the deduction on tax returns for tax years ending after September 10, 2001. Therefore taxpayers who have already filed returns may be eligible for the additional depreciation. These taxpayers must file amended returns if they want to take advantage of the tax break of a higher depreciation deduction. For taxpayers who haven’t filed their return yet, they will want to consider requesting an automatic six-month extension of time to file, in order to allow time to make the necessary changes. The extension request and payment of any estimated taxes due must be made by the return’s original due date.

In general, the bill’s depreciation provisions are:

-- For new property NOT located within the New York Liberty Zone:

1. A 30% additional first-year special depreciation allowance is required in the year in which qualified property is placed in service. Generally, qualified property includes: 1) property with a recovery period of 20 years or less, 2) section 167(f)(1)(B) computer software, 3) qualified leasehold improvement property, and 4) water utility property (which has a 25-year recovery period).
   
   
2. The property must be acquired after September 10, 2001 and before September 11, 2004. It must be placed in service before January 1, 2005, except for certain property having longer production periods, in which case it must be placed in service before January 1, 2006.
   
   
3. The first-year depreciation limitation on automobiles will increase by $4,600.
   
   
4. Any Section 179 deductions or ITC basis adjustments reduce the basis of qualifying property before the 30% allowance is calculated.
   
   
5. The additional depreciation deduction will be allowed when computing the alternative minimum tax (AMT). In addition, no AMT adjustment is made in regards to the yearly depreciation on the remaining basis of qualifying assets.
   
   
6. The adjusted basis of the property is reduced by the 30% special allowance before regular depreciation is calculated on the asset in the place in service year and following years.
   
   
7. Taxpayers can elect out of the 30% allowance, on a yearly basis, by class of assets. The election applies to the whole class, or classes, of assets for which the election is made. If the election-out is made for automobiles, then the first-year depreciation limitation for autos is NOT increased by $4,600.

-- For qualified property within the New York Liberty Zone:

1. The above rules are applied for a longer period. Personal property described above must be acquired after September 10, 2001 and placed in service by December 31, 2006.
   
   
2. Non-residential real property and residential rental property is also eligible for the 30% first year deduction, if replacing damaged or destroyed property, and when placed in service by December 31, 2009.
   
   
3. The Section 179 expensing limitation is increased by the lesser of $35,000 or the cost of section 179 property that is qualified New York Liberty Zone Property placed in service during the taxable year. This increase has the same duration as the personal property 30% deduction -- 6 years.
   
   
4. Qualified leasehold improvements placed in service after September 10, 2001 and before January 1, 2007 are depreciable over five (5) years instead of the usual 39 years. These improvements are not eligible for the 30% allowance.

Best Software will make every attempt keep you advised of the latest impact of new legislation on depreciation and fixed asset management. Our products will incorporate new changes and features to comply with them as a continued benefit of SupportPlus.

Example Calculation

ABC Services, a calendar year taxpayer, opens a new office in December 2001 and places qualifying office furniture and fixtures totaling $100,000 in service in the fourth quarter. ABC is eligible for Section 179 expensing of $24,000 and the 30% special depreciation allowance.

Although ABC placed more than 40% of their assets in service in the last three months of their tax year, under IRS Revenue Procedure 2000-70, ABC elects out of applying the midquarter averaging convention rules, instead applying the half-year averaging convention.

The new rules require Section 179 expense to be deducted from the basis before the 30% allowance is calculated. The 30% allowance further reduces the depreciable basis before MACRS depreciation is calculated.

The depreciable basis is: