Chapter 3A.
Prod. Activities Deduct.
Corporate AMT
Howard Godfrey, Ph.D., CPA
Professor of Accounting
Copyright © Howard Godfrey, 2014
Edited January 10, 2014
C13-Chp-03-1A-AMT-2014
Students should:
1. Understand the basics of the Production
Activities Deduction. [Page 1]
2. Understand the purpose of the AMT and its
focus on timing of benefits. [Page 16]
3. Understand the AMT formula. [Page 17]
4. Understand the exemption from AMT for small
corporations. [Page 17]
5. Understand nature of AMT adjustments & why
they may be positive or negative. [Page 18]
6. Understand how different AMT depreciation
methods cause different asset basis amounts,
and multiple amounts of gain on sale of assets.
[Page 19]
Students should be:
7. Understand how to make appropriate
adjustments where taxpayer uses the
completed contract method for long-term
construction contracts. [Page 19]
8. Understand how to report preferences.
[Page 20]
9. Be able to properly report the ACE adjustment.
[Page 21]
10. Compute the AMT exemption [Page 24]
11. Understand the AMT Credit [Page 25]
12. Complete the process by computing the
amount of AMT and the AMT credit.
U.S. Production Activities Deduction.
Corporations are allowed a U.S. production
activities deduction equal to a percentage
times the lesser of:
(1) qualified production activities income
or
(2) taxable income before the U.S.
production activities deduction.
For 2005-2006 the percentage was 3%; 20072009 it is 6%; and, 2010 and
thereafter it is 9%.
The deduction cannot exceed 50% of the W-2
wages for the year. The effect - lowering
marginal tax bracket about 3%.
Qualified production activities income
includes gross receipts from domestic
production reduced by cost of goods sold,
directly allocable expenses and a ratable
portion of other deductions not directly
allocable. Domestic production gross
receipts include receipts from the lease,
rental, license, sale, exchange, or other
disposition of qualified production property
manufactured, produced, grown, or
extracted in whole or significant part within
the United States, qualified film production,
or electricity, natural gas, or potable water
produced within the United States.
5
It also includes construction
performed in the U.S. & engineering or
architectural services performed in the
United States for construction of
projects in the United States.
Domestic production gross receipts
do not include receipts from the sale
of food & beverages the taxpayer
prepares at a retail establishment and
do not apply to the transmission of
electricity, natural gas, or potable
water.
6
Please study the shaded areas
of section 199 in the file for the
section that is posted on the
website.
C14-Chp-03-3-Section-199Prod-Activities-Ded
Part of that material is also
included in following slides.
7
Sec. 199. INCOME ATTRIBUTABLE TO
DOMESTIC PRODUCTION ACTIVITIES
(a) Allowance of Deduction.
(1) In general. There shall be allowed as a
deduction an amount equal to 9 percent of
the lesser of
(A) the qualified production activities
income of the taxpayer for the taxable
year, or
(B) taxable income (determined without
regard to this section) for the taxable year.
8
(c) Qualified Production Activities Income For
purposes of this section
(1) In general. The term "qualified production
activities income" for any taxable year means
an amount equal to the excess (if any) of(A) the taxpayer's domestic production gross
receipts for such taxable year, over
(B) the sum of(i) the cost of goods sold that are allocable to
such receipts, and
(ii) other expenses, losses, or deductions (other
than the deduction allowed under this
section), which are properly allocable to
such receipts.
9
(4) Domestic production gross receipts.
(A) In general. The term "domestic
production gross receipts" means the
gross receipts of the taxpayer which
are derived from
(i) any lease, rental, license, sale,
exchange, or other disposition of(I) qualifying production property
which was manufactured, produced,
grown, or extracted by the taxpayer
in whole or in significant part within
the United States, …
10
Company sells furniture to Walmart
Co. manufacures in U.S. & imports some furniture.
Total Operations ($000)
Makes Imports Total
$2,500 $1,500 $4,000 62.50%
Sales
($1,000) ($750) ($1,750) 57.14%
Cost of Sales
$1,500
$750 $2,250
Gross Margin
($800)
Other expenses
$1,450
Net Income
QPAI
DPAD
Taxable Income
Use Simplified Deduction Method - Pg. 14.
Ignore payroll limit.
Company sells furniture to Walmart
Co. manufacures in U.S. & imports some furniture.
Total Operations ($000)
Makes Imports Total
$2,500 $1,500 $4,000 62.50%
Sales
($1,000) ($750) ($1,750) 57.14%
Cost of Sales
$1,500
$750 $2,250
Gross Margin
($500)
($800)
Other expenses
$1,450
Net Income
$1,000
QPAI
DPAD - 9%
$90
($90)
Taxable Income
$1,360
Use Simplified Deduction Method
What is taxable income for the year (2012)?
Campbell Corporation's taxable income for
2013 before the domestic production
activities deduction was $25,000,000. Its
taxable income from qualified production
activities in 2013 was $10,000,000.
Campbell Corporation's W-2 wages
allocable to qualified production activities
for 2013 were $8,000,000.
What is Campbell Corporation's taxable
income for 2013?
a. $21,000,000 b. $24,100,000
c. $23,500,000 d. $24,250,000
13
Answer. b. Campbell Corporation's
domestic production activities
deduction is $900,000 (9% × lesser of):
(1) $25,000,000 or
(2) $10,000,000.
Deduction cannot exceed 50% × W-2
wages for qualified production
activities:
(50% × $8,000,000 = $4,000,000).
Thus, its taxable income is $24,100,000
($25,000,000 - $900,000).
14
AMT
Students should have a
copy of
AMT-Code-Outline.xls
Which is included in the lecture
handout materials
15
16
17
Background on AMT
Congress was concerned that
corporations were not paying
enough income tax because of
1. Having income that is tax-free
2. Deferring income to a later period
3. Taking large deductions currently
that could be deferred
4. Etc.
Background on AMT
Some solutions in the AMT, which is a
separate tax (an additional income tax).
1. Compute AMT by including some income
(that is tax-exempt --not included in
regular tax computations).
2. Compute AMT by including some
income in AMT tax base this period
(that is otherwise deferred to a future
period in regular tax computations
[long-term contracts]).
3. Compute AMT by deferring recognition
of expenses to future periods (that are
deducted currently in regular tax
computations. [depreciation]).
AMT Formula - 1
If a corporation's tentative minimum tax
exceeds the regular tax, the excess amount
is
a. Subtracted from the regular tax.
b. Payable in addition to the
regular tax.
c. Carried back to the third
preceding taxable year.
d. Carried back to the first preceding
taxable year. (CPA-May-1990)
20
AMT Formula - 2
If a corporation's tentative
minimum tax exceeds the
regular tax, the excess amount
is
b. Payable in addition to the
regular tax.
See Sec. 55(a)
C12-Chp-03-3-AMT-Code-Outline.xls
21
Corp. AMT Formula-Overview - 1
Regular Tax. Income Before NOL Ded.
Plus/Minus Adjustments- Asset sold-AMT Basis Adj.
Plus/Minus AMT Adjustments (except ACE Adjust.)
Plus
Tax Preferences
Equals
AMTI before AMT NOL ded. & ACE Adj.
Plus/Minus ACE Adjustment. 75% of (ACE-AMTI)
Equals
AMTI before AMT NOL
Minus
AMT NOL (Limited to 90% of above amt.)
Minus
U.S. production activities adjustment
Equals
Alternative min. taxable income (AMTI)
22
Corp. AMT Formula-Overview - 2
Alt. min. taxable income (AMTI)
Minus
Exemption (after phase-out if any)
Equals
Tentative minimum tax base
Multiply 20% Rate
Equals
Tentative min. tax before AMT FTC
Minus
AMT Foreign Tax Credit (FTC)
Equals
Tentative minimum tax
Regular tax before credits, except FTC
Equals Alternative Min. Tax (AMT) if positive
Minus
23
Red. Inc. Alternative Min. Tax - 1 of 3
Taxable income
Tax Preferences & Adjustments
Alt. Minimum Taxable Income
Minus: Exemption
$400,000
600,000
$1,000,000
$40,000 - .25 X [$1,000,000 - $150,000]
Tax base for AMT
Tax (AMT base X 20% )
Minus: Regular tax liability
Alternative Minimum Tax
335,000
65,000
400,000
34%
24
Red. Inc. Alternative Min. Tax - 2 of 3
Taxable income
Tax Preferences & Adjustments
Alt. Minimum Taxable Income
Minus: Exemption
$ 400,000
600,000
1,000,000
$40,000 - .25 X [$1,000,000 - $150,000]
1,000,000
200,000
(136,000)
$ 64,000
Tax base for AMT
Tax (AMT base X 20% )
Minus: Regular tax liability
Alternative Minimum Tax
335,000
65,000
400,000
34%
113,900
22,100
136,000
What is the Alt. Min. Tax Credit? Pg. 25.
Red. Co. Alt. Min. Tax Exempt.
Tentative Exemption
AMTI
$40,000
1,000,000
Threshold
150,000
Excess
850,000
Percentage
Reduce Exemp.
Exemption
Section 55(d)(2), (3)
25%
(212,500)
$0
Corporate Alternative Minimum Tax
Adjustments -Pg. 18.
Recomputation of certain income,
gain, deduction, and loss items.
May either increase or decrease
taxable income.
Tax preference items - Pg. 20.
Tax preferences will always
increase taxable income.
Interest on Private activity bond issued in 2009-2010 was
not a preference. Investors had stopped buying them.
Adjusted Current Earnings– ACE- Pg 21
A corp. makes a positive adjustment equal to
75% of the excess of its adjusted current
earnings (ACE) over pre-adjustment AMTI.
ACE is a concept based on the earnings and
profits definition found in Sec. 312.
A negative ACE adjustment also can be
made when pre-adjustment AMTI exceeds
ACE.
The negative adjustment is 75% of the
excess of pre-adjustment AMTI over ACE,
but not in excess of the corporation's prior
net positive ACE adjustments.
28
ACE adjustment
= 75% of difference between AMTI and
ACE
–Can be positive or negative
–Negative adjustment is limited to
aggregate positive adjustments
Starting point for determining ACE is AMTI
–AMTI is defined as regular taxable
income after AMT adjustments and tax
preferences (other than the NOL and
ACE adjustments)
29
Alternative Minimum Tax - 1 of 5
Ignore the small corp. exception. We will use small numbers to keep it simple.
Tax Return Information
GAAP
Sales
Cost of Sales
500,000
(200,000)
500,000
(200,000)
500,000
(200,000)
500,000
(200,000)
Gross Margin
Div. income (12% owned)
300,000
10,000
300,000
10,000
300,000
10,000
300,000
10,000
Mun. interest (essential gov.)
100,000
Pg. 3-23
100,000
Private activity bond interest
250,000
250,000
250,000
Proceeds-life ins. on officer
Dividends Received Deduct.
200,000
Deprec. ($40,000, $32,000, $26,000)
Other Expenses
(32,000)
(63,000)
(40,000)
(63,000)
Net inc./T. Income/AMTI/ACE
765,000
200,000
Difference
See Concept Summaries
1120
Pg. 3-20
(7,000)
AMTI
Pg. 3-23
(7,000)
(32,000)
(63,000)
ACE
200,000
Pg. 3-23
(26,000)
(63,000)
458,000
771,000
$313,000
75%
$234,750
Alternative Minimum Tax - 2 of 5
Regular taxable income before NOL deduction
Plus/minus: AMT adjustments (except ACE adjustment)
Plus: Tax preferences
Private activity bond interest
Equals: AMTI before AMT NOL ded & ACE adjustment
Plus/minus: ACE adjustment (75% of ACE minus AMTI)
Equals: AMTI before AMT NOL deduction
Minus: AMT NOL deduction (limited to 90%)
Equals: Alternative minimum taxable income (AMTI)
Minus: Exemption (See Computation Below)
Equals: Tentative alternative minimum tax base
Times: 20% rate
Equals: Tentative AMT before AMT foreign tax credit
Minus: AMT foreign tax credit (possibly 90% limit)
Equals: Tentative minimum tax
Minus: Regular tax liab. before credits, less for. tax credit
Equals: Alternative minimum tax (AMT)
$200,000
Alternative Minimum Tax - 3 of 5
Regular taxable income before NOL deduction
Plus/minus: AMT adjustments (except ACE adjustment)
Plus: Tax preferences
Private activity bond interest
Equals: AMTI before AMT NOL ded & ACE adjustment
Plus/minus: ACE adjustment (75% of ACE minus AMTI)
Equals: AMTI before AMT NOL deduction
Minus: AMT NOL deduction (limited to 90%)
Equals: Alternative minimum taxable income (AMTI)
Minus: Exemption (See Computation Below)
Equals: Tentative alternative minimum tax base
Times: 20% rate
Equals: Tentative AMT before AMT foreign tax credit
Minus: AMT foreign tax credit (possibly 90% limit)
Equals: Tentative minimum tax
Minus: Regular tax liab. before credits, less for. tax credit
Equals: Alternative minimum tax (AMT)
$200,000
8,000
250,000
458,000
234,750
692,750
692,750
0
692,750
20%
138,550
138,550
(61,250)
$ 77,300
Alternative Minimum Tax - 4 of 5
Tentative Exemption
$40,000
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
33
Alternative Minimum Tax - 5 of 5
Tentative Exemption
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
$40,000
692,750
150,000
542,750
25%
(135,688)
$0
34
Big Corp operations for 2014. 1 of 2
Revenue
$2,000,000
Expenses
1,800,000
Taxable income
$200,000
Received Life Ins. Proceeds
$100,000
Completed contract method is used
for a 3-year construction contract
started in 2014. With percentage of
completion method, profit of $100,000
will be recognized in each of the 3
years of contract. What is 2014 AMTI?
a. $300,000 b. $250,000 c. $375,000
Big Corp. 2014. 2 of 2
Alternative Minimum Tax
Taxable income
$200,000
Adjustment- LT Contract
100,000
Preadjustment AMTI
300,000
ACE adj. 75% of life ins.
75,000
Tax base for AMT - AMTI $375,000
36
Corporate AMT Exemption
The exemption amount for
corporations is $40,000.
Exemption is reduced by 25% of
excess of AMTI over $150,000.
Phased-out when AMTI reaches
$310,000.
Sec. 55(d)(2) and (3)
AMT-Code-Outline.xls
37
Rona Corporation – 1 of 3
Rona Corp.'s 2014 alternative
minimum taxable income was
$200,000.
Rona's 2014 alternative minimum
exemption is
a. $0
b. $12,500
c. $27,500
d. $52,500
CPA - May, 1991
38
Alt. Min. Tax Exemption
Tentative Exemption
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
$40,000
200,000
39
Alt. Min. Tax Exempton
Tentative Exemption
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
$40,000
200,000
150,000
50,000
25%
(12,500)
$27,500
40
Minimum Tax Credit.
AMT is an acceleration of the
payment of a corporation's
income taxes.
When a corp. pays the AMT, it is
allowed a credit that can be
carried over and used to offset
its regular (income) tax
liabilities in subsequent years.
41
Minimum Tax Credit.
The corporate AMT credit (MTC) equals the
entire AMT amount paid. The MTC that can
be used in a tax year equals the total of the
net minimum taxes paid since 1986, minus
the amount claimed as MTC in those years.
Use of available MTCs in the current year is
limited to the excess of
(1) regular tax liability (minus all credits
other than refundable credits) over
(2) its tentative minimum tax.
Indefinite carryover period.
Tax Credits and the AMT.
A corporation is allowed to
reduce its regular tax liability by
any available credit.
For most corporations, the
general business credit can be
claimed only to the extent that
the corporation's regular tax
liability exceeds its tentative
minimum tax amount.
43
Minimum Tax Credit
Small corporations (no longer
subject to AMT) with unused
minimum tax credits after
1997 may use them against
regular tax liability
Limit = regular tax - [25% X
(regular tax - $25,000)]
44
Tax Planning Considerations
AMT Elections. Two elections permit taxpayers to
defer the claiming of certain deductions for
income tax purposes. An extended write-off
period applies to certain expenditures (e.g.,
research and experimental expenditures) that
would otherwise be tax preference items or
adjustments. If this extended write-off period is
elected, the expenditures will not be a tax
preference item.
A second election permits a taxpayer to elect to
use the depreciation method generally required
for AMT purposes--the 150% declining balance
method over the property's class life for
personalty--in computing its regular tax liability.
45
Eliminating the ACE Adjustment.
C corporations are required to
increase their AMTI by the amount
of the ACE adjustment.
If the C corporation is closely-held,
it can elect to be taxed under the S
corporation rules and this
adjustment can be avoided.
46
Eastern Inc. was formed Jan. 2, 2014
On 1-2-14, Eastern placed in service five-year
property depreciated under MACRS system.
Eastern did not elect the straight-line method.
The following information pertains to Eastern:
Eastern's 2014 taxable income
$300,000
Adjustment for the accelerated deprec.
taken on 2014 five-year property
1,000
2014 tax-exempt interest from private
activity bonds issued after 8/7/86
5,000
What was Eastern's 2014 alternative minimum
taxable income before ACE adjustment?
a. $306,000 b. $305,000 c. $304,000 d. $301,000 CPA-95
Eastern - Alt. Min. Tax
1
Taxable income before NOL
2
Plus/minus: AMT Adjustment
1,000
3
Plus: Tax preferences
5,000
4
Preadjustment AMTI
5
Plus/minus: ACE adjustment
6
Minus: AMT NOL deduction
7
Minus: Adjust. U.S. Production
8
Alt. Min. Tax. Income (AMTI)
$300,000
306,000
48
Eastern - Alt. Min. Tax
8
9
10
11
Alt. Min. Tax. Income (AMTI)
Minus: Exemption (Below)
Alterntive Minium tax base
Times: 20% rate
12
Tentative AMT before credits
13
Minus: AMT foreign tax credit
14
Tentative minimum tax
15
Minus: Regular tax liability
16
Alternative Min. Tax (AMT)
49
17
Eastern - Alt. Min. Tax
Exemption Computation
18
Tentative Exemption
19
AMTI
Threshold
Excess
Percentage
20
21
22
23
24
$40,000
150,000
25%
Reduction in exemp.
Exemption Allowed
50
Eastern - Alt. Min. Tax
25
Reg. Tax
26
First $50,000
15%
27
Next $25,000
25%
28
Next $25,000
34%
29
Excess
39%
30
Excess
Totals
34%
31
Layers
Rate
Tax
51
Continue the Eastern
Corporation case above.
Actually it is repeated on next
slide.
Assume there are no additional
adjustments.
What is the AMT Exemption?
What is the regular tax?
What is the AMT?
52
Eastern Inc. was formed Jan. 2, 2014
On 1-2-14, Eastern placed in service five-year
property depreciated under MACRS system.
Eastern did not elect the straight-line method.
The following information pertains to Eastern:
Eastern's 2014 taxable income
$300,000
Adjustment for the accelerated deprec.
taken on 2014 five-year property
1,000
2014 tax-exempt interest from private
activity bonds issued after 8/7/86
5,000
What was Eastern's 2014 alternative minimum
taxable income before ACE adjustment?
a. $306,000 b. $305,000 c. $304,000 d. $301,000 CPA-95
Eastern-Alternative Minimum Tax
1
Taxable income before NOL
2
Plus/minus: AMT Adjustment
1,000
3
Plus: Tax preferences
5,000
4
Preadjustment AMTI
5
Plus/minus: ACE adjustment
6
Minus: AMT NOL deduction
7
Minus: Adjust. U.S. Production
8
Alt. Min. Tax. Income (AMTI)
$300,000
306,000
306,000
54
Eastern-Alternative Minimum Tax
Tentative Exemption
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
$40,000
306,000
150,000
156,000
25%
(39,000)
$ 1,000
55
Eastern - Regular Tax
Reg. Tax
Layers
First $50,000
50,000
15%
7,500
Next $25,000
25,000
25%
6,250
Next $25,000
25,000
34%
8,500
200,000
39%
34%
78,000
Excess
Excess
Totals
300,000
Rate
Tax
100,250
56
Eastern-Alternative Minimum Tax
Alt. Min. Tax. Income (AMTI)
$306,000
Minus: Exemption
(1,000)
Alterntive Minium tax base
305,000
Times: 20% rate
20%
Tentative AMT before credits $61,000
Minus: AMT foreign tax credit
Tentative minimum tax
$61,000
Minus: Regular tax liability
$100,250
Alternative Min. Tax (AMT)
$0
57
Local Corporation (1 of 5)
Local has regular taxable
income of $100,000.
Tax preference items and
positive adjustments total
$170,000.
Local has no credits. AMT is
a. $26,000. b. $29,500.
c. $22,500. d. $10,000. e. $0.
58
Local Corp. Alt. Minimum Tax (2 of 5)
Taxable income
$100,000
Preference & Adjustments
170,000
Alt. minimum tax. income
Minus: Exemption
($40,000-.25 X [$270,000 -$150,000])
Tax base for AMT
Tax (AMT base X 20% )
Minus: Regular tax liability
Alternative Minimum Tax
59
Local Corp. Alt. Minimum Tax (3 of 5)
Taxable income
$100,000
Preference & Adjustments
170,000
Alt. minimum tax. income
270,000
Minus: Exemption
($40,000-.25 X [$270,000 -$150,000])
(10,000)
Tax base for AMT
260,000
Tax (AMT base X 20% )
52,000
Minus: Regular tax liability
(22,500)
Alternative Minimum Tax
$ 29,500
60
Local - Alt. Min. Tax Exemp.
Tentative Exemption
AMTI
Threshold
Excess
Percentage
Reduce Exemp.
Exemption
$40,000
270,000
150,000
120,000
25%
(30,000)
$10,000
61
Local - Regular Tax
Reg. Tax
Layers
First $50,000
50,000
15%
7,500
Next $25,000
25,000
25%
6,250
Next $25,000
25,000
34%
8,500
Excess
39%
0
Excess
Totals
34%
100,000
Rate
Tax
22,250
62
Small Corporation Exemption - 1
For tax years beginning after 1997, small
corporations are not subject to AMT
–A small corporation has average annual
gross receipts of $5 million or less for
the preceding three-year period
–Small corporation continues to qualify
as long as average gross receipts for the
preceding three-year period do not
exceed $7.5 million
–Sec. 55(e)
63
Small Corporation Exemption -2
A corporation can maintain its
exemption from the AMT if?
a. it reports average gross receipts
of less than $1,000,000 per year
b. it reports average gross receipts
of less than $7,500,000 per year
c. it reports average gross receipts
of less than $5,000,000 per year
64
Small Corporation Exemption -3
A corporation can maintain its
exemption from the AMT if?
b. it reports average gross receipts
of less than $7,500,000 per year
65
Moreland Co. – AMT – 1 of 4
Moreland has this income, etc. this year:
Taxable income
$100,000
Depreciation adjustment
18,000
Installment gain (not inventory sale)
80,000
(Recognized for GAAP, not for Tax)
Fed. income tax prov. in Fin. stmts.
75,000
Penalties and fines
2,000
Private activity bond interest income
25,000
Other tax-exempt interest
20,000
Deprec. adjustment is an AMT adjustment.
Private activity bond interest is tax preference.
Moreland Co. – AMT – 2 of 4
Calculation of AMTI before ACE:
Taxable income
Add:
Priv. Act. Bond income
Depreciation adjust.
AMTI
67
Moreland Co. – AMT – 2 of 4
Calculation of AMTI before ACE:
Taxable income
$ 100,000
Add:
Priv. Act. Bond income
25,000
Depreciation adjust.
18,000
AMTI
$ 143,000
68
Moreland Co. – AMT – 3 of 4
Calculation of ACE Adjustment:
AMTI before ACE
$ 143,000
Add:
Deferred installment gain
Other tax-exempt income
Adjusted current earnings
Less: AMTI
Base amount for Ace Adj.
Times rate:
ACE Adjustment (positive)
69
Moreland Co. – AMT – 3 of 4
Calculation of ACE Adjustment:
AMTI before ACE
$ 143,000
Deferred installment gain
80,000
Other tax-exempt income
20,000
Adjusted current earnings
243,000
Less: AMTI
143,000
Base amount for Ace Adj.
100,000
Times rate:
75%
ACE Adjustment (positive) $ 75,000
70
Moreland Co. – AMT – 4 of 4
Calculation of AMT:
AMTI before ACE
Plus: ACE Adjustment
AMTI
Less: Exemption
Alternative min. tax base
20% rate
Tentative minimum tax
Less: regular tax
AMT(TMT-Regular tax)
$143,000
75,000
218,000
23,000
195,000
x 20%
39,000
(22,250)
$16,750
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C Corporation Case – Old Law (Pg. 1 of 2)
• Dad started a C Corporation -- usually
breaks even. Has little or no E & P.
• Owned by Dad & two adult children.
• Dad has terminal illness – will die soon.
Corp. will collect life ins. of $10,000,000.
• Corporation does not need the money,
and will distribute the money to Widow
and Children.
Do you see any Tax Problems?
72
C Corporation Case (Pg. 2 of 2)
• C Corp. will owe AMT (ACE adj.)
• 20% (of 75%) gives AMT of $1,500,000
• That leaves $8,500,000 for distribution
• Tax-free income increases E & P
• Stockholders will pay about 40%, or
another $3,200,000. (Old tax law)
• This is a total of $4,800,000 in tax.
• Stockholders keep (after tax)
$5,200,000.
• Would a temporary S election help?
73
Note:
The purpose of the table (next
two slides) is to show how
our earlier study of earnings
and profits set the stage for
understanding the concept of
adjusted current earnings.
74
Slide 1 of 2
Impact of Transactions
on ACE and E&P
Adjust
AMTI to
Adjust
Income to
get ACE
get E & P
Add
Add
Federal income tax
No effect
Subtract
Div. rec. ded. (80% & 100% rules)
No effect
Add
Dividends rec. ded. (70% rule)
Add
Add
Exemption amount of $40,000
No effect
No effect
Add
Add
No effect
Subtract
Tax-exempt income (net of expense)
Key employee insurance proceeds
Excess charitable contribution
75
Slide 2 of 2
Impact of Transactions
on ACE and E&P
Adjust
AMTI to
Adjust
Income to
get ACE
get E & P
Excess capital losses
No effect
Subtract
Disallowed travel & entertainment
No effect
Subtract
Penalties and fines
No effect
Subtract
Int. drilling costs deducted currently
Add
Add
Deferred gain on installment sales
Add
Add
Unrecognized gain-invol. conv.
No effect
No effect
Loss on sale - related parties
No effect
Subtract
76
Compliance and Procedural Considerations
The corporate AMT
liability is reported on
Form 4626
(Alternative Minimum Tax
-- Corporations).
77
The
End
78