IRS Website: Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations
On its website, IRS has set out rules regarding sequestration of the corporate alternative minimum tax (AMT) credit, including that, for tax years that begin after Dec. 31, 2017, there will be no such sequestration.
Background on AMT credits and Former Section 168(k)(4). When a taxpayer pays AMT, an AMT credit is created under Code Sec. 53(b). This credit is applied against regular tax liability in later years when the regular tax (subject to certain reductions) is higher than the tentative minimum tax. (Code Sec. 53(c)) The credit can be carried forward indefinitely but cannot be carried back or used to offset future AMT liability.
A bonus first-year depreciation allowance applies to “qualified property” (generally, new property depreciated under MACRS with a recovery period of 20 years or less). (Code Sec. 168(k); Reg. § 1.168(k)-1(d)(1)). For tax years beginning before Jan. 1, 2018, corporations could elect under Former Section 168(k)(4) to “swap” bonus and accelerated depreciation in exchange for an increased AMT credit limitation (subject to a phaseout).
For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed. (Code Sec. 55 as amended by the Tax Cuts and Jobs Act, P.L. 115-97, 2017) For tax years all corporations that begin after 2017 and before 2022, the AMT credit is refundable in an amount equal to 50% of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. For tax years beginning in 2021, the 50% amount becomes 100%. (Code Sec. 53(e))
Background on sequestration. Under sequestration, “automatic” across-the-board spending cuts are made to deal with the government’s budget deficit. Historically, refund payments issued to corporations claiming refundable prior year minimum tax liability are subject to sequestration.
IRS announcement. IRS has now announced that, for tax years beginning before 2018, refunds/credits that result from corporations electing under Former Section 168(k)(4) to forgo bonus depreciation and accelerate their use of prior-year minimum tax credits are subject to sequestration. As such, refund payments processed on or after 10/1/18 and on or before 9/30/19 will be reduced by the 6.2% sequestration rate, irrespective of when IRS received the original or amended return.
However, for tax years beginning after 2017, refund payments due to refundable minimum tax credits under IRC Sec. 53(e) will not be subject to sequestration.
References: For the AMT credit, see FTC 2d/FIN ¶ A-8801 et seq.; United States Tax Reporter ¶ 534 et seq.
