570 Notes, 15-1
Chapter 15
Alternative Minimum Tax
I.
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
II.
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
570 Notes, 15-2
IV.
Exemption Amounts
Individual Taxpayers
C Corporations
Single
Married, Joint
Married, Sep.
Initial Exemption
Phaseout
V.
$46,700
$70,950
$35,475
$40,000
25% (AMTI >
$112,500)
25% (AMTI >
$150,000)
25% (AMTI >
$75,000)
25% (AMTI >
$150,000)
AMT Rates
Individual Taxpayers


VI.
26% on 1st $175,000 ($87,500 MFS) of base
28% on excess
C Corporations

Flat 20%
Taxpayers Affected by AMT
A. Individuals - everyone
B.
C Corporations
1.
Small corporations are exempt.
a.
“Small” is defined as average annual gross receipts of less than $7.5
million for the 3-year period preceding the tax year. ($5m in the 1st 3
years of corporate life)
b.
Corporations are automatically classified as small in the 1st year of
existence.
C.
S Corporations?
VII. AMT Credit
A. Reason available is to prevent having to pay tax at the highest rates on the timing
differences, i.e., when positive, the AMT applies, but when negative, the regular tax
applies.
B. Offsets regular income tax liability.
C. Applies ONLY to adjustments that are timing differences
D. See examples 26-28.
570 Notes, 15-3
VIII. Adjustments Applicable to All Taxpayers
Item:
Circulation Expenditures
Treatment under:
Regular Taxable Income
AMT
Expense immediately
Amortize over 3 years
Depreciation - Real Property
 1987-1998 placed in
service
MACRS (S/L) over 27.5, 31.5, ADS (S/L) over 40 yrs.
or 39 yrs.

MACRS (S/L) over 27.5 or 39
yrs.
Same as regular taxable
income
MACRS (200% DB), class
lives
ADS (150% DB), longer lives
MACRS (200% DB) over
class lives; §179; bonus
ADS (150% DB) over class
lives; §179 & bonus same
Pollution Control Facilities
 1987-1998 placed in
service
Amortize over 60 mo.
ADS over appropriate AMT
class lives

MACRS
Same as regular taxable
income
10-yr. Write-offs:
 Mining Exploration &
Development Costs;
 Research & &
Experimental
Expenditures
Expensed as incurred
Amortized over 10 yrs.
Long-Term Contract Revenue
Recognition
Completed contract may be
allowed
Percentage of completion only
Gain or loss on sale of asset
SP - adjusted basis
Same as regular tax, but using
AMT methods
NOLs
Operating loss, CB 2, CF 20
Same as regular tax, but using
AMT methods & 90% limit on
offset
Post-1998 placed in
service
Depreciation - Personalty
 1987-1998 placed in
service

Post-1998 placed in
service
Post-1998 placed in
service
570 Notes, 15-4
IX.
Adjustments Applicable ONLY to Individuals
Item:
Incentive Stock Options
(ISOs)
Treatment under:
Regular Taxable Income
AMT
No income at exercise
Recognize income (FMV - cost)
when forfeiture provision expires
(or exercise if later). Basis is
increased for income recognized.
Passive Activity Losses
Can use only to offset
Passive Activity Income
Same as regular tax, but using
AMT methods
Itemized Deductions



medical > 7.5% AGI
taxes
interest







casualty losses
charitable contributions
miscellaneous
phaseout (3% AGI >
certain amt.)


Standard deduction
Personal & dependency
exemptions
Other adjustments
medical >10% AGI
only IRD estate tax
interest, 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
570 Notes, 15-5
X.
Adjustments Applicable ONLY to Corporations
A. The ACE (Adjusted Current Earnings) Adjustment:
B.
1.
ACE Adjustment = 75% x (ACE - AMTI before ACE)
2.
ACE employs earnings & profits concepts
3.
ACE adjustment can be + or -, 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)
Effect on
Transaction
Unadjusted AMTI
in Arriving at ACE
Tax-exempt income (net of expenses)
Add
Dividends received deduction (70% rule)
Add
Key employee insurance proceeds
Add
Intangible drilling costs deducted currently Add
Deferred gain on installment sales
Add
Loss on sale between related parties
Subtract
Net buildup on life insurance policy
Add
LIFO recapture (LIFO > FIFO)
Add
Effect on Taxable
Income in Arriving
at E&P
Add
Add
Add
Add
Add
Subtract
Add
Add
Exemption amount of $40,000
Federal income tax
Dividends received deduction (80% &
100% rules)
Excess capital losses
Disallowed travel & entertainment
expenses
Penalties and fines
Excess charitable contribution
No effect
No effect
No effect
No effect
Subtract
Add
No effect
No effect
Subtract
Subtract
No effect
No effect
Subtract
Subtract
570 Notes, 15-6
XI.
Preferences - Applicable to All Taxpayers
Item:
Percentage Depletion
Regular Taxable Income
No aggregate limit on %
depletion, so Accum. Depl.
can exceed basis
Intangible Drilling Costs
(IDC)
Expense as incurred.
Private Activity Bond Interest
Income
Exempt
Depreciation - Real Property
and Leased Personal Property
(PRE - 1987 placed in service)
ACRS, class lives
Preferences – Applicable to Individual Taxpayers Only
§ 1202 Stock
50% of Gain Excluded
Treatment under:
AMT
% depletion cannot exceed
basis. Add back any amounts
exceeding basis.
Preference for Excess IDC=
IDC incurred this yr.
- IDC / 10 yrs
- 65% of net oil/gas
income
Taxable
ADS (S/L), AMT lives
(longer)
7% of the 50% excluded
amount is preference
XII. Example of the basis adjustment:
Bob acquires an asset for $100,000 in 2010. Depreciation for regular tax is: 2010 = $33,000;
2011 = $25,000. Depreciation for AMT is: 2010 = $26,000; 2011 = $21,000. Bob sells the
asset in 2012 for $50,000.
Regular Tax
2010
2011
2012
Adjustment
AMT