Some Refundable Tax Credits
Some refundable tax credits are subject to sequestration.
The IRS said in a statement posted to its website in August that a 38% haircut applied through September 30 this year to any refunds taxpayers received who choose to forego a depreciation bonus on new equipment and instead turn in unused alternative minimum tax credits that they are carrying forward for cash.
The federal government is currently subject to across-the-board cuts in spending under a “sequestration” program that took effect last March 1 after Congress failed to reach agreement on spending cuts. The automatic spending cuts were a fallback budget plan agreed to by Congress if it could not agree on how to make spending cuts. Sequestration will remain in effect for nine years. It requires spending reductions of $109 billion a year each year. The cuts are spread evenly between defense and non-defense spending. The Office of Management and Budget calculates the percentage reductions in different programs.
The IRS said the haircut in AMT tax credit refunds applies to such refunds claimed on original or amended tax returns beginning August 13, 2013. A different haircut will apply to refunds approved for payment on or after October 1 this year. The percentage haircuts must be recalculated by OMB at the start of each fiscal year. The government’s fiscal year runs from October 1 to September 30.
The haircut does not reduce the AMT credit itself, only the amount of cash refund that a company can receive. It is not a permanent loss. The difference not paid in cash should remain a tax credit carryforward.
The United States has essentially two different income taxes: regular income taxes and an “alternative minimum tax” at a lower rate on a broader definition of taxable income that must be paid to the extent it exceeds the regular tax. A portion of any AMT paid may then be claimed as a credit against regular taxes in future years.
It is unclear whether the IRS intends to start reducing payments on other refundable tax credits.