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570 Notes, 15-1

Chapter 15
Alternative Minimum Tax
I.

II.

General
A. AMT is separate (alternative), but parallel income tax system
B.
AMT computation reconciles Taxable Income with Alternative Minimum Taxable
Income (AMTI) through adjustments and preferences
Computing AMT - the formula:
Taxable Income
+/- Adjustments
+
Preferences
=
AMTI
Exemption
=
AMT tax base
x
AMT rate(s)
=
Tentative Minimum Tax (net of AMT Foreign Tax Credit)
Regular income tax (net of Foreign Tax Credit)
=
AMT

III. Adjustments and Preferences (in general)
A. Adjustments
1.
Can be positive or negative
2.
Timing differences - reverse themselves
3.
Example (from text): X incurs circulation expenses of $30,000 in 2010, which
may be immediately expensed for regular tax purposes. For AMT purposes, the
expenses must be amortized over 3 years. The reconciliation and adjustments for
2010-2012 are:
Year
2010

Regular

2011
2012

B.

Preferences
1.
Positive only
2.
Permanent - do not reverse themselves

Adjustment

AMT

C Corporations 1.475 $40. Offsets regular income tax liability. Corporations are automatically classified as small in the 1st year of existence. the AMT applies. Small corporations are exempt.570 Notes.950 $35. C.000) 25% (AMTI > $150. Joint Married.500 MFS) of base 28% on excess C Corporations  Flat 20% Taxpayers Affected by AMT A. S Corporations? VII. the regular tax applies. i. Sep. AMT Credit A. Reason available is to prevent having to pay tax at the highest rates on the timing differences.700 $70. C. but when negative.500) 25% (AMTI > $150. 26% on 1st $175.000 ($87. See examples 26-28.000) AMT Rates Individual Taxpayers   VI. 15-2 IV.5 million for the 3-year period preceding the tax year. a. ($5m in the 1st 3 years of corporate life) b. $46. Applies ONLY to adjustments that are timing differences D.. . when positive. Exemption Amounts Individual Taxpayers C Corporations Single Married.000) 25% (AMTI > $75.everyone B.000 25% (AMTI > $112. Individuals . Initial Exemption Phaseout V.e. B. “Small” is defined as average annual gross receipts of less than $7.

ADS over appropriate AMT class lives  MACRS Same as regular taxable income 10-yr. bonus ADS (150% DB) over class lives.adjusted basis Same as regular tax.5 or 39 yrs. but using AMT methods NOLs Operating loss. CF 20 Same as regular tax. or 39 yrs. longer lives  MACRS (200% DB) over class lives.5.Personalty  1987-1998 placed in service MACRS (200% DB). 15-3 VIII.  Research & & Experimental Expenditures Expensed as incurred Amortized over 10 yrs.570 Notes. 31. ADS (S/L) over 40 yrs.  MACRS (S/L) over 27. Same as regular taxable income Depreciation . Adjustments Applicable to All Taxpayers Item: Circulation Expenditures Treatment under: Regular Taxable Income AMT Expense immediately Amortize over 3 years Depreciation . CB 2. class lives ADS (150% DB). §179 & bonus same Pollution Control Facilities  1987-1998 placed in service Amortize over 60 mo. but using AMT methods & 90% limit on offset Post-1998 placed in service Post-1998 placed in service Post-1998 placed in service .5. Write-offs:  Mining Exploration & Development Costs. Long-Term Contract Revenue Recognition Completed contract may be allowed Percentage of completion only Gain or loss on sale of asset SP . §179.Real Property  1987-1998 placed in service MACRS (S/L) over 27.

570 Notes. but using AMT methods Itemized Deductions    medical > 7. Adjustments Applicable ONLY to Individuals Item: Incentive Stock Options (ISOs) Treatment under: Regular Taxable Income AMT No income at exercise Recognize income (FMV .)   Standard deduction Personal & dependency exemptions Other adjustments medical >10% AGI only IRD estate tax interest. Basis is increased for income recognized. Passive Activity Losses Can use only to offset Passive Activity Income Same as regular tax. 15-4 IX. but only  home acquisition debt  investment interest included in AMTI  casualty losses  charitable contributions  only gambling losses  phaseout does NOT apply   Not allowed Not allowed .cost) when forfeiture provision expires (or exercise if later).5% AGI taxes interest        casualty losses charitable contributions miscellaneous phaseout (3% AGI > certain amt.

AMTI before ACE) 2. ACE employs earnings & profits concepts 3. The ACE (Adjusted Current Earnings) Adjustment: B. 15-5 X. ACE adjustment can be + or -. ACE Adjustment = 75% x (ACE . Adjustments Applicable ONLY to Corporations A.000 Federal income tax Dividends received deduction (80% & 100% rules) Excess capital losses Disallowed travel & entertainment expenses Penalties and fines Excess charitable contribution Effect on Unadjusted AMTI in Arriving at ACE Add Add Add Add Add Subtract Add Add Effect on Taxable Income in Arriving at E&P Add Add Add Add Add Subtract Add Add No effect No effect No effect No effect Subtract Add No effect No effect Subtract Subtract No effect No effect Subtract Subtract . but the negative adjustment is limited to the net of the positive adjustments for prior years. Impact of Various Transactions on ACE and E&P (for Ch. 19) Transaction Tax-exempt income (net of expenses) Dividends received deduction (70% rule) Key employee insurance proceeds Intangible drilling costs deducted currently Deferred gain on installment sales Loss on sale between related parties Net buildup on life insurance policy LIFO recapture (LIFO > FIFO) Exemption amount of $40.570 Notes. 1.

Real Property and Leased Personal Property (PRE . Regular Tax 2010 2011 2012 Adjustment AMT .000 in 2010. Depreciation for regular tax is: 2010 = $33.570 Notes. Preferences . . so Accum.000.65% of net oil/gas income Taxable ADS (S/L). 2011 = $25. Private Activity Bond Interest Income Exempt Depreciation . Preference for Excess IDC= IDC incurred this yr.000. 2011 = $21. Add back any amounts exceeding basis. Example of the basis adjustment: Bob acquires an asset for $100.Applicable to All Taxpayers Item: Percentage Depletion Regular Taxable Income No aggregate limit on % depletion. AMT lives (longer) 7% of the 50% excluded amount is preference XII. Depreciation for AMT is: 2010 = $26. class lives Preferences – Applicable to Individual Taxpayers Only § 1202 Stock 50% of Gain Excluded Treatment under: AMT % depletion cannot exceed basis. can exceed basis Intangible Drilling Costs (IDC) Expense as incurred.000. Bob sells the asset in 2012 for $50.000.1987 placed in service) ACRS.IDC / 10 yrs . Depl.000. 15-6 XI.