Chapter 15
Alternative Minimum Tax
Comprehensive Volume
Copyright ©2010 Cengage Learning
Comprehensive Volume
C15-1
Alternative Minimum Tax
(AMT)
• AMT is separate from, but parallel to, the
regular income tax system
• The AMT computation reconciles taxable
income, through adjustments and
preferences, with Alternative Minimum
Taxable Income (AMTI)
Comprehensive Volume
C15-2
Computation of AMT
• AMT formula:
Taxable income
± Adjustments
+ Preferences
AMTI
– Exemption
AMT base
× AMT rate(s)
Tentative minimum tax
– Foreign tax credit
– Regular tax
Equals AMT
Comprehensive Volume
C15-3
AMT Adjustments And Preferences
(slide 1 of 3)
• Most AMT adjustments relate to timing differences
– Timing differences eventually reverse
• Positive adjustments will be offset by negative adjustments in the
future, and vice versa
– Example - circulation expenditures
• For regular income tax purposes, circulation expenditures can be
deducted in the year incurred
• For AMT purposes, however, circulation expenditures must be
deducted over a three-year period
• Certain AMT adjustments do not relate to timing
differences
– These adjustments result in a permanent difference between
taxable income and AMTI
• e.g., Itemized deductions
Comprehensive Volume
C15-4
AMT Adjustments And Preferences
(slide 2 of 3)
• AMT Preferences
– Designed to take back all or part of the tax
benefits obtained by certain items in the
computation of taxable income for regular
income tax purposes
• Taxable income is increased by tax preference items
effectively disallowing those tax benefits for AMT
purposes
Comprehensive Volume
C15-5
AMT Adjustments And Preferences
(slide 3 of 3)
• Tax preferences include:
–
–
–
–
Percentage depletion in excess of basis
Excess intangible drilling costs
Interest on certain private activity bonds
Excess of accelerated over straight-line depreciation on
real & leased personal property placed in service before
1987
– Excess of amortization allowance over depreciation on
pre-1987 certified pollution control facilities
– 7% of the exclusion from gross income of gains on the
sale of certain small business stock
Comprehensive Volume
C15-6
Other Components of AMT
(slide 1 of 3)
• Exemption amount
– The exemption reduces AMTI to arrive at the
base on which AMT is computed
– The initial exemption amount is:
• $46,700 for single
• $70,950 for married, filing jointly
• $35,475 for married, filing separately
Comprehensive Volume
C15-7
Other Components of AMT
(slide 2 of 3)
• Exemption amount
– Exemption amount is reduced by 25% of AMTI
in excess of
• $112,500 for single
• $150,000 for married, filing jointly
• $75,000 for married, filing separately
Comprehensive Volume
C15-8
Other Components of AMT
(slide 3 of 3)
• AMT rates
– A progressive rate structure is applied to the tax
base (AMTI less exemption amount)
• 26% on first $175,000 ($87,500 for married, filing
separately) of tax base
• 28% on remaining amount of tax base
– Net capital gain and qualified dividend income
included in AMT base are taxed at favorable
alternative tax rates (15% or 0%)
Comprehensive Volume
C15-9
Personal Tax Credits
• For tax years 2000–2009
– All nonrefundable personal credits can offset
both the regular income tax (less foreign tax
credit) and the AMT
Comprehensive Volume
C15-10
Adjustments
(slide 1 of 15)
• Since adjustments tend to arise from timing
differences between regular tax and AMT
– Adjustments can be positive or negative, and
will generally reverse in later years
Comprehensive Volume
C15-11
Adjustments
(slide 2 of 15)
• Circulation expenditures
– Amortized over 3 years for AMT
• Expensed in year incurred for regular tax
Comprehensive Volume
C15-12
Adjustments
(slide 3 of 15)
• The AMT depreciation adjustment for real
property applies only to real property placed in
service before January 1, 1999
• For real property placed in service after
December 31, 1998, MACRS recovery periods
apply for AMT
– Thus, the AMT adjustment is effectively eliminated
Comprehensive Volume
C15-13
Adjustments
(slide 4 of 15)
• For real property placed in service after 1986
(MACRS property) and before January 1, 1999
– AMT depreciation is computed under the alternative
depreciation system (ADS)
• Uses the straight-line method over a 40-year life
– Regular tax MACRS lives are 27.5, 31.5, and
39 years
Comprehensive Volume
C15-14
Adjustments
(slide 5 of 15)
• Depreciation of post-1986 personal property
– AMT method is 150% DB over ADS life
– Regular tax is generally MACRS method based on
200% DB over shorter lives
• Effective for personalty placed in service after
12/31/98, MACRS recovery periods are to be used
for AMT
– If 150% DB is elected for this property, there is no
AMT adjustment
Comprehensive Volume
C15-15
Adjustments
(slide 6 of 15)
• Pollution control facilities
– Depreciate under the ADS over appropriate
class life for AMT
• Amortize over 60 months for regular tax purposes
– Effective for pollution control facilities placed
in service after 12/31/98, MACRS recovery
periods are to be used for AMT
Comprehensive Volume
C15-16
Adjustments
(slide 7 of 15)
• Mining exploration/development costs and
research/experimental expenditures
– Amortized over 10 years for AMT
• Expensed in year incurred for regular tax purposes
– Taxpayer may elect to capitalize and amortize
over 10 years for regular tax purposes and thus
avoid the AMT adjustment
Comprehensive Volume
C15-17
Adjustments
(slide 8 of 15)
• Completed contract method
– AMT requires the use of percentage of
completion method for long-term contracts
rather than completed contract method
Comprehensive Volume
C15-18
Adjustments
(slide 9 of 15)
• Incentive stock options (ISOs)
– The exercise of an ISO can cause income for
AMT purposes that is not currently taxable for
regular tax purposes
• Excess of FMV over exercise price is adjustment in
year stock is freely transferable or not subject to
substantial risk of forfeiture
Comprehensive Volume
C15-19
Adjustments
(slide 10 of 15)
• Adjusted gain or loss
– Since the adjusted basis of an asset can be
different for regular tax and AMT, gain or loss
recognized upon the disposition of an asset may
vary for the two tax systems
– Difference between regular tax gain (loss) and
AMT gain (loss) is adjustment
Comprehensive Volume
C15-20
Adjustments
(slide 11 of 15)
• Passive activity losses
– Passive losses must be recomputed for AMT
using AMT provisions
Comprehensive Volume
C15-21
Adjustments
(slide 12 of 15)
• Net operating loss (NOL)
– NOL must be recomputed for AMT using AMT
provisions
Comprehensive Volume
C15-22
Adjustments
(slide 13 of 15)
• Itemized deductions allowed for AMT
purposes include:
•
•
•
•
•
•
Casualty losses
Gambling losses
Charitable contributions
Medical expenses in excess of 10% of AGI
Estate tax attributable to IRD
Qualified interest
– May differ from regular tax allowed qualified residence
and investment interest
Comprehensive Volume
C15-23
Adjustments
(slide 14 of 15)
• Itemized deductions not allowed for AMT:
– Taxes and miscellaneous itemized deductions
subject to the 2% AGI limit
• Itemized deduction cutback does not apply
for AMT
– Regular tax cutback amount reduces AMTI
Comprehensive Volume
C15-24
Adjustments
(slide 15 of 15)
• Other adjustments
– AMT does not allow the standard deduction
and personal and dependency exemptions
Comprehensive Volume
C15-25
Preferences
(slide 1 of 5)
• Preferences tend to arise because of
deductions or exclusions that provide
substantial tax benefits
– Unlike adjustments, preferences can only be
positive (i.e., increase AMTI)
– Thus, preferences reduce the benefits initially
received when computing regular tax
Comprehensive Volume
C15-26
Preferences
(slide 2 of 5)
• Percentage depletion
– Preference is the amount of percentage
depletion taken for regular tax which is in
excess of the adjusted basis of the property at
the end of the year
Comprehensive Volume
C15-27
Preferences
(slide 3 of 5)
• Intangible drilling costs
– AMT requires 10 year amortization; deductible
currently for regular tax
– Preference is excess of regular tax deduction
over [AMT amortization plus (65% × net oil &
gas income)]
Comprehensive Volume
C15-28
Preferences
(slide 4 of 5)
• Interest on private activity bonds
– This interest is not taxable for regular tax purposes but
is included in income for AMT purposes
– Expenses incurred in carrying these bonds are not
deductible for regular tax purposes, but offset the
interest income in computing the AMT preference
– Interest on private activity bonds issued after December
31, 2008 and before January 1, 2011 is not treated as a
tax preference
Comprehensive Volume
C15-29
Preferences
(slide 5 of 5)
• 50% exclusion of gain on sale of certain
small business stock is excludible from
gross income for regular tax
– 7% of the excluded amount is a tax preference
for AMT
Comprehensive Volume
C15-30
AMT Credit
• AMT attributable to timing differences is
AMT Credit
– Excess of AMT over AMT computed without
timing differences
• AMT credit can be carried forward
(indefinitely) to be used to offset regular
income tax liability
– Cannot carryback or use against AMT liability
Comprehensive Volume
C15-31
Corporate AMT
(slide 1 of 4)
• Major differences in AMT rules for
corporations
– AMT rate is a flat 20%
– Exemption amount is $40,000
• Reduced by 25% of amount by which AMTI
exceeds $150,000
Comprehensive Volume
C15-32
Corporate AMT
(slide 2 of 4)
• Major differences in AMT rules for
corporations (cont’d)
– Adjusted current earnings (ACE) adjustment
• Adjustment = 75% × (ACE – AMTI before ACE)
• ACE employs some earnings and profits concepts
but certain differences exist
• Adjustment can be positive or negative
Comprehensive Volume
C15-33
Corporate AMT
(slide 3 of 4)
• AMT is repealed for small corporations for
tax years beginning after 12/31/97
– Small corporation has average annual gross
receipts of not more than $5 million for the 3
year period beginning after December 1993
– Retains classification if average gross receipts
for the 3 year period preceding the current year
do not exceed $7.5 million
Comprehensive Volume
C15-34
Corporate AMT
(slide 4 of 4)
• A new corporation is automatically
classified as a small corporation its first tax
year of existence
Comprehensive Volume
C15-35
Minimum Tax Credit
• All of a corporation’s AMT is available for
carryover as a minimum tax credit
– Does not matter whether the adjustments and
preferences originate from timing differences or
AMT exclusions
Comprehensive Volume
C15-36
If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA
trippedr@oneonta.edu
SUNY Oneonta
Comprehensive Volume
C15-37