Concepts in Federal Taxation
American Recovery and Reinvestment Tax Act of 2009
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) (hereafter, AART)
made numerous changes to the income tax law that affects the 2010 edition of
Concepts in Federal Taxation. This update explains the changes as it impacts each
chapter and provides problems that illustrate these changes. The following topics are
covered in this update:
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Exclusion of unemployment benefits (Chapter 3)
Qualified Small Business Stock exclusion increased (Chapters 3 & 11)
Carryback of 2008 Net Operating Losses expanded (Chapter 7)
Sales tax on new vehicles deductible (Chapter 8)
Increase in refundable portion of child credit (Chapter 8)
Increase in earned income credit expanded (Chapter 8)
Hope Scholarship Tax Credit increased (Chapter 8)
Section 179 deduction increased (Chapter 10)
Additional first-year depreciation allowed (Chapter 10)
Alternative Minimum Tax Exemption increased (Chapter 15)
Chapter 3
Unemployment Compensation
Amounts received from state unemployment compensation benefits are considered
substitutes for earned income and are taxable to the recipient. Beginning in 2009, the
AART allows the exclusion of up to $2,400 of unemployment compensation benefits.
EXAMPLE 1 Erica is laid off from her job at an electronics store during 2009. She
receives $6,800 in unemployment compensation benefits during 2009. How much of
the unemployment compensation payments are included in Erica’s gross income?
Discussion: Erica is allowed to exclude $2,400 of the unemployment compensation
benefits. Therefore, she includes $4,400 ($6,800 - $2,400) in her gross income.
Tax Treatment of Capital Gains
To stimulate investment in certain small businesses, 50 percent of the gain (not reduced
by capital losses) from qualified small business stock that is held for more than five
years is excluded from taxation. The gain remaining after the exclusion is taxed at a
maximum rate of 28 percent; it is not eligible for the 15 percent long-term capital gains
rate. The AART increases the exclusion percentage to 75 percent for stock acquired
after February 17, 2009 and before January 1, 2011.
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Problems
50. Has the taxpayer in each of the following situations received taxable
income? If so, when should the income be recognized? Explain.
a. Charlotte is a lawyer who specializes in drafting wills. She wants to give her
husband a new gazebo for Christmas. In November, she makes a deal with
Joe, a local handyman, to build a gazebo. In return, Charlotte is to draft a
will for Joe's father. The gazebo normally would cost $3,000, which is
approximately what Charlotte would charge for drafting the will. Joe builds
the gazebo in time for Christmas. Charlotte drafts the will and delivers it to
Joe the following January.
b. Ed buys 500 shares of Northstar common stock in January 2006 for $4,000.
On December 31, 2006, the shares are worth $4,600. In March 2007, Ed
sells the shares for $4,500.
c. Dayo is the director of marketing for Obo, Inc. In December, the board of
directors of Obo votes to give Dayo a $10,000 bonus for the excellent work
she had done throughout the year. The check is ordered and written on
December 15 but is misplaced in the mail room and is not delivered to Dayo
until January 5.
d.
John is unemployed. During the current year he receives $4,000 in
unemployment benefits. Because the unemployment is not enough to live
on, John sells drugs to support himself. His total revenue for the year is
$120,000. The cost of the drugs is $60,000.
51. Elwood had to retire early because of a job-related injury. During the
current year, he receives $10,000 in Social Security benefits. In addition,
he receives $6,000 in cash dividends on stocks that he owned and $8,000
in interest on tax-exempt bonds. Assuming that Elwood is single, what is
his gross income if
a. He receives no other income?
b. He also receives $11,000 in unemployment compensation?
c. He sells some land for $80,000? He paid $45,000 for the land.
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Chapter 7
Net Operating Losses
Taxpayers that suffer a net operating loss (NOL) can generally take a deduction for the
loss in another tax year. Under the general rule, taxpayers may carry back an NOL two
years. If there is insufficient income in the carry back period, the remaining loss is
carried forward for twenty years. A taxpayer may elect not to carry back the loss and
instead use the twenty year carry forward period to deduct the loss.
The AART allows eligible small businesses to elect to carry back 2008 net operating
losses for three, four, or five years. An eligible small business is generally a business
that had average annual gross receipts of no more than $15 million for the three-year
period ending with the year of the loss. A 2008 net operating loss is defined as a loss
incurred in a year ending in 2008. Eligible small businesses may elect to use the
expanded carry back periods on an NOL for a tax year that begins in 2008.
EXAMPLE 1 Torino Corporation is an eligible small business that has a September 30
fiscal year end. It has suffered losses for the past two years. Under the general rule,
Torino’s NOL for the year ended September 30, 2008 is eligible for the expanded carry
back period. However, it could elect to apply the expanded carry back for the tax year
that began on October 1, 2008.
The expanded NOL carry back allows small businesses to obtain immediate relief for
2008 operating losses that would not be available under the general rule.
EXAMPLE 2 Lambert Inc., an eligible small business, incurs a $40,000 net operating
loss in 2008. Lambert had operating incomes of $40,000 in 2004 and $60,000 in 2005,
but suffered operating losses of $10,000 and $20,000 in 2006 and 2007.
Discussion: Under the general rule for NOL’s, Lambert would have carried back the
2006 and 2007 NOL’s to 2004 (reducing 2004 operating income to $10,000) and
obtained refunds of taxes paid in those years. Under the general rule, it would not be
able to carry back the 2008 NOL to 2004 or 2005. However, as an eligible small
business, Lambert can elect to carry back its 2008 NOL to 2004 and 2005. This allows
Lambert to get an immediate refund of taxes for the 2008 operating loss.
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Problems
3.
What are the net operating loss carryback and carryforward periods? Does a
taxpayer have a choice of the years to which a net operating loss can be carried?
Explain.
20. Ronaldo Inc., suffers a net operating loss of $200,000 for its 2008 tax year. It had
taxable income of $50,000 in 2003, $50,000 in 2004, $100,000 in 2005, and
$25,000 in 2006 and 2007. If Ronaldo Inc., is an eligible small business, how should
it treat the 2008 net operating loss?
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Chapter 8
Taxes
Taxpayers are allowed a deduction from gross income for state sales and excise taxes
paid on new motor vehicles purchased after February 17, 2009 and before January 1,
2010. The deduction is allowed for both the regular tax calculation and the alternative
minimum tax calculation. Taxpayers who do not itemize deductions may deduct the tax
as increase in the standard deduction amount. To prevent a double deduction, a
taxpayer who elects to deduct state and local sales taxes in lieu of deducting state and
local income taxes cannot take an extra deduction for motor vehicle taxes.
Deductible taxes are defined as any state or local sales or excise tax paid on the
purchase of a qualified motor vehicle. A qualified motor vehicle is a passenger
automobile, light truck, or motorcycle weighing 8,500 pounds or less, or a motor home
of any weight. The motor vehicle purchased must be a new, not a used, vehicle.
The amount of the deduction is limited to the taxes imposed on the first $49,500 of the
vehicles purchase price. The amount of the deduction is phased-out over a $10,000
range when the taxpayer’s modified adjusted gross income exceeds $125,000
($250,000 married, filing jointly). Taxpayers with MAGI greater than $135,000 ($260,000
married, filing jointly) are not eligible for the deduction.
EXAMPLE 1 Lynn is married. He and his wife purchase a new vehicle costing $40,000
on July 1, 2009. They pay $1,800 in state and local sales tax on the purchase. Their
itemized deductions for 2009 total $9,000 without considering their deduction for motor
vehicle sales taxes. What is their deduction from AGI?
Discussion: The vehicle is new and costs less than $49,500. Therefore, Lynn and his
wife may deduct the $1,800 in state and local taxes. Because their total itemized
deductions are less than their $11,400 standard deduction, they will deduct the
standard deduction amount. However, the motor vehicle tax deduction is added to the
standard deduction amount, resulting in a deduction from AGI of $13,200 ($11,400 +
$1,800).
EXAMPLE 2 Assume the same facts as in example 1, except that their itemized
deductions total $13,000 without considering the deduction for motor vehicle sales
taxes. What is their deduction from AGI?
Discussion: Because their total itemized deductions are greater than their standard
deduction amount, they will itemize their deductions. The $1,800 in motor vehicle sales
taxes are added to their other $13,000 of itemized deductions, for a total deduction of
$15,800.
EXAMPLE 3 Assume the same facts as in example 1, except that the vehicle cost
$60,000. What is the amount of their deduction for sales taxes paid on the vehicle
purchase?
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Discussion: Because the vehicle costs more $49,500, the amount of the deduction is
reduced. They are only allowed to deduct the state and local sales tax on the first
$49,500 of the purchase price, $1,485 ($1,800 x [$49,500 ÷ $60,000]. As in Example 1,
they will deduct their standard deduction amount plus the $1,485 deduction for state
and local sales tax paid on the vehicle.
EXAMPLE 4 Assume the same facts as in example 1, except that their modified
adjusted gross income is $254,000. What is the amount of their deduction for sales tax
paid on the vehicle purchase?
Discussion: Because their modified adjusted gross income exceeds $250,000, the
amount of the deduction for motor vehicle sales taxes is phased-out over a $10,000
range. The $1,800 in sales taxes paid is reduced by 40% [($254,000 - $250,000) ÷
$10,000), resulting in a $1,080 [$1,800 – ($1,800 x 40%)] deduction. As in Example 1,
they will deduct their standard deduction amount plus the $1,080 deduction for state
and local sales tax paid on the vehicle. NOTE: If their modified adjusted gross income
was greater than $260,000, no deduction for motor vehicle sales taxes would be
allowed.
Child Credit
The child tax credit is refundable to the extent the taxpayer’s earned income exceeds a
base amount that is adjusted for inflation ($12,550 in 2009). The AART reduces the
base amount to $3,000 for 2009 and 2010 (the 2010 amount will be adjusted for
inflation). Therefore, for 2009, the refundable credit for families with 1 or 2 qualifying
children is calculated as follows:
Maximum refundable credit = 15% x (earned income - $3,000)
However, the amount refunded cannot exceed the amount of the credit remaining after
reducing the tax liability to zero. For families with 3 or more qualifying children, the
maximum credit is the greater of the amount calculated using the above formula or the
following formula:
Maximum refundable credit = Social Security tax paid – earned income credit
Generally, a taxpayer with 3 or more qualifying children will benefit from the second
formula only if the taxpayer is not eligible for the earned income credit because of
excessive earned income.
EXAMPLE 48 Howard and Paula have 2 children under age 17, have earned income of
$26,100 and pay $2,000 in Social Security tax. Their tax liability is $300 before the
child credit. What amount can they claim as a child credit and what portion is
refundable?
Discussion: Howard and Paula’s child tax credit is $2,000 ($1,000 x 2), which is
greater than their $300 income tax liability. The maximum amount of the credit that can
be refunded is $3,465 [15% x ($26,100 - $3,000). The $2,000 child credit will reduce
their $300 tax liability to zero, and they will receive a refund of $1,700 ($2,000 - $300).
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EXAMPLE 49 Assume the same facts as in example 48, except that Howard and Paula
have 3 children under age 17 and are not eligible for the earned income credit. Their
tax liability is $700 before the child credit. What amount can they claim as a child credit
and what portion is refundable?
Discussion: Howard and Paula’s child credit is $3,000 ($1,000 x 3), which is greater
than their $700 income tax liability. The maximum amount of the credit that can be
refunded is the greater of:
$3,465 = 15% x ($26,100 - $3,000)
or
$1,600 = $1,600 - $0
The available child credit of $3,000 will reduce their $700 tax liability to zero. The
maximum child credit that can be refunded is $3,465. However, the refundable credit is
limited to the $2,300 ($3,000 - $700) credit remaining after reducing the tax liability to
zero.
Earned Income Credit
The earned income credit (EIC) is a refundable tax credit designed to provide relief to
low-income taxpayers who continue to work. The amount of the credit depends on the
taxpayer’s earned income and phases out after the taxpayer’s income reaches a
predetermined amount. Although having a qualifying child is not required to receive the
credit, taxpayers with one or two qualifying children receive a larger credit. For 2009
and 2010, the AART provides an increased credit for taxpayers with 3 or more
qualifying children. In addition, the beginning of the phase-out is increased by $5,000 for
all married taxpayers, increasing the amount of their EIC.
Higher Education Tax Credits
The Hope Scholarship Tax Credit (HSTC) is a nonrefundable credit for tuition and
related expenses paid for the first two years of post-secondary education. In 2009, the
HSTC provides for a 100 percent tax credit on the first $1,200 of qualifying expenses
and a 50 percent tax credit on the next $1,200 of qualifying expenses paid during the
year for each qualifying student (maximum credit of $1,800). The credit is phased-out
ratably for married taxpayers with adjusted gross income between $100,000 and
$120,000 and for all other taxpayers with adjusted gross income between $50,000 and
$60,000.
The AART renames the HSTC the American Opportunity Tax Credit (AOTC) and
modifies if for 2009 and 2010. First, the credit is expanded to cover the first four years of
post-secondary education, allowing students in their third and fourth years of education
to claim the credit in 2009 and 2010. The second modification expands the definition of
qualifying expenses to include course materials (books and other required course
materials). In addition, forty percent of the otherwise allowable AOTC is refundable in
2009 and 2010.
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The calculation of the HSTC is modified in two significant ways. First, the amount of the
credit is increased to the sum of 100 percent of the first $2,000 of qualifying expenses
and 25 percent of the next $2,000 of qualifying expenses (maximum credit of $2,500).
In addition, the phase-out ranges are increased to ratably phase-out for married
taxpayers with adjusted gross income between $160,000 and $180,000 and for all other
taxpayers with adjusted gross income between $80,000 and $90,000.
EXAMPLE 57 Shaw and Oriana are married and have two children. In 2009, Sophia is a
sophomore and Jonas is a junior in college. Shaw and Oriana’s adjusted gross income
is $110,000. They pay $1,700 in tuition, $500 for books, and $2,200 for her room and
board. Jonas’s tuition and fees are $4,500, his books cost $600 and his room and
board is $2,600. What amount can Shaw and Oriana claim for the American
Opportunity Tax Credit?
Discussion: Both Sophia and Jonas’s expenses qualify for the AOTC. Only tuition and
related fees and course materials qualify for the credit. Sophia’s qualifying expenses
total $2,200 ($1,700 + $500) and her allowable credit is $2,050 {$2,000 + [($2,200 $2,000) x 25%]. Jonas has $5,100 ($4,500 + $600) in qualifying expenses and his
AOTC is the $2,500 maximum credit. Shaw and Oriana’s total allowable American
Opportunity Tax Credit is $4,550. Because their AGI is less than $160,000, the full
amount of the credit is allowed.
EXAMPLE 59 Assume the same facts as in example 57, except that Shaw and Oriana’s
adjusted gross income is $164,000. What is their allowable higher education tax credit?
Discussion: Shaw and Oriana’s higher education tax credit is reduced to $3,640.
Because their adjusted gross income exceeds $160,000 they must reduce their
allowable tax credit ratably over a $20,000 range:
20% = ($164,000 - $160,000) ÷ $20,000
$3,640 = $4,550 – ($4,550 x 20%)
EXAMPLE 60 Assume the same facts as in example 57, except that Shaw and Oriana’s
adjusted gross income is $66,000, their taxable income is $35,000, and their income
tax liability is $4,415. What is their allowable higher education tax credit?
Discussion: As in example 57, Shaw and Oriana’s otherwise allowable credit is
$4,550, which is greater than their $4,415 income tax liability. However, forty percent of
their $4,550 credit, $1,820 ($4,550 x 40%) is refundable. The remaining $2,730
($4,550 - $1,820) credit is nonrefundable and is limited to their income tax liability.
Therefore, Shaw and Oriana can claim the full $4,550 ($1,820 refundable + $2,730
nonrefundable) credit.
EXAMPLE 61 Assume the same facts as in example 60, except that their taxable
income is $21,600 and their income tax liability is $2,400. What is their allowable
higher education tax credit?
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Discussion: As in example 60, forty percent of their $4,550 credit ($1,820) is
refundable. The remaining $2,730 credit is nonrefundable and is limited to their $2,400
income tax liability. Therefore, Shaw and Oriana can only claim a $4,220 ($1,820
refundable + $2,400 refundable) higher education tax credit.
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Problems
25.
Is the child credit refundable? Explain.
28.
Compare and contrast the Hope Scholarship Tax Credit with the Lifetime Learning
Tax Credit.
40. Paula lives in South Carolina which imposes a state income tax. During
2009, she pays the following taxes:
Federal tax withheld
State income tax withheld
State sales tax – actual receipts
Real estate tax
Property tax on new car (ad valoreum)
Social Security tax
Gasoline taxes
Sales tax on new car
5,125
1,900
270
1,740
215
4,324
124
112
a. If Paula’s adjusted gross income is $35,000 what is her allowable deduction
for taxes?
b. Assume the same facts as in part a, except that Paula pays $1,600 in sales
tax on a sail boat she purchased during the year. What is Paula’s allowable
deduction for taxes?
c. Assume the same facts as in part a and that Paula’s other allowable
itemized deductions total $800. What is her allowable deduction from
adjusted gross income?
68. Miguel and Katrina have 2 children under age 17, have earned income of
$24,300, and pay $1,836 in Social Security tax. Their tax liability is $1,050
before the child credit.
a. What amount can they claim as a child credit, and what portion of the credit
is refundable?
b. Assume the same facts as in part a, except that Miguel and Katrina have 3
children under age 17 and are not eligible for the earned income credit.
Their tax liability is $800 before the child credit. What amount can they
claim as a child credit, and what portion of the credit is refundable?
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73. Martina is single and has two children in college. Matthew is a sophomore,
and Christine is a senior. Martina pays $3,200 in tuition and fees, $600 for
books, and $2,000 for Mathews room and board. Christine's tuition and
fees are $4,800, her books cost $750, and her room and board expenses
are $1,800. Martina's adjusted gross income is $50,000.
a. What amount can Martina claim as a tax credit for the higher education
expenses she pays?
b. Assume that Martina’s income tax liability is $4,000. How much of the
higher education tax credit is refundable?
c. Assume that Martina's adjusted gross income is $82,000 and her income
tax liability is $8,500. What amount can she claim as a tax credit for the
higher education expenses she pays?
74. Brendan and Theresa are married and have three children in college. Their
twin daughters, Christine and Katlyn, are freshmen and attend the same
university. Their son, Kevin, is in an MBA program. Brendan and Theresa
pay $12,000 in tuition and fees ($6,000 each) for their daughters and
$4,200 in tuition and fees for Kevin. The twins’ room and board is $2,600,
while Kevin's room and board is $1,400. Brendan and Theresa have an
adjusted gross income of $77,000.
a. What amount can they claim as a tax credit for the higher education
expenses they pay?
b. Assume that their adjusted gross income is $107,000. What amount can
they claim as a tax credit for the higher education expenses they pay?
c. Assume the same facts as in part a, except that Kevin is a freshman and
the twins are in graduate school. What amount can Brendan and Theresa
claim as a tax credit for the higher education expenses they pay?
75. Daniel is 25, single, and operates his own landscaping business. He enrolls
in a turf management class at Vorando University. The tuition for the class
is $4,000 and he spends $500 on books and other related course materials.
He pays the tuition by borrowing $4,000 from a local bank. His adjusted
gross income for the year is $42,000 and he is the 25% marginal tax rate
bracket. What is the most advantageous tax treatment for Daniel’s higher
education expenses?
89. Casandra and Gene are married and have a daughter who is a junior at
State University. Their adjusted gross income for the year is $78,000, and
they are in the 25% marginal tax bracket. They paid their daughter's $3,600
tuition and $3,200 in room and board with $4,500 in savings and by
withdrawing $2,200 from a Coverdell Education Savings Account.
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Chapter 10
Section 179 and Additional 1st Year Depreciation
The American Recovery and Reinvestment Act of 2009 (ARRT) increases the Section
179 Election to Expense deduction and provides for additional 1 st year depreciation for
qualifying property placed in service during tax years that begin after December 1, 2007
and before January 1, 2010. Property placed in service in tax years beginning after
2009 are not eligible for the increased deductions provided by the ARRT.
The Section 179 Election to Expense is increased to $250,000 (from $133,000). In
addition, the phase-out of the deduction for excess investment is increased from
$530,000 to $800,000. Thus, taxpayers who place less than $800,000 of qualifying
property in service during a tax year beginning in 2009 will be able to expense up to
$250,000 of the cost of the property.
Section 179 Election to Expense
Section 179 allows an annual current expense deduction for the cost of qualifying depreciable
property purchased for use in a trade or business. The deduction for expensed assets is treated
as a depreciation deduction. This election allows many small businesses to expense assets as
they are purchased instead of depreciating them over several years. The immediate deduction
promotes administrative convenience by eliminating the need for extensive depreciation
schedules for small purchases.
Qualified Taxpayers
In 2009, individuals, corporations, S corporations, and partnerships may elect to deduct as an
expense up to $250,000 in investment in qualified property to be used in an active trade or
business. A husband and wife are considered one entity for purposes of the election to
expense. Although the phrase ‘‘active trade or business’’ is not defined in the tax law, it appears
to have the same meaning as the phrase ‘‘trade or business’’ (Chapter 5). The elements of profit
motivation, regularity, and continuity of the taxpayer’s involvement in the activity and the
absence of hobby, amusement, and similar motivations are important factors to consider when
determining whether an activity qualifies for the Section 179 election. This interpretation is
supported by the fact that the deduction is not allowed for assets purchased for use in an
activity related to the production of income (an investment activity). However, the portion of a
mixed-use asset that is used in a trade or business does qualify for immediate deduction under
Section 179. Estates and trusts cannot use the Section 179 election to expense assets. The
election is not available to these entities because they are formed to protect and conserve the
entity’s assets for the benefit of the beneficiaries and not to operate an active trade or business.
Qualified Property
The Section 179 expense deduction is allowed only on depreciable, tangible, personal property
used in a trade or business. Examples of eligible property are trucks, machinery, furniture,
computers, and store shelving. Real property, such as buildings and their structural
components, does not qualify for the special election to expense. Also excluded from the
deduction are land and improvements made directly to the land, such as a parking lot,
sidewalks, or a swimming pool. In addition, qualifying property does not include intangible
assets such as patents, copyrights, and goodwill.
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EXAMPLE 3 Kelly purchases a new computer and a new telephone system and installs
a new roof and an air-conditioning system in her office building. Which of the
expenditures qualify for the election to expense?
Discussion: The computer and the telephone system are depreciable, tangible,
personal property and therefore qualify under Section 179. The roof and the airconditioning system are integral parts of the office building. Therefore, they are real
property and do not qualify for immediate expensing.
Limitations on Deduction
The Section 179 election-to-expense deduction is subject to three limitations:
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A taxpayer’s annual Section 179 deduction cannot exceed the maximum annual
limitation ($250,000 for 20098).
■
If the taxpayer’s investment in Section 179 property exceeds $800,000 for the tax year,
the annual deduction limit is reduced by one dollar for each dollar of investment over
$800,000 in 2009. For 2009, a taxpayer who purchases more than $1,050,000 of
qualifying property may not take any election-to-expense deduction for any of the
purchases.
■
The Section 179 deduction allowed for a tax year cannot exceed the taxable income
from the active conduct of all the taxpayer’s trade or business activities.
Annual Deduction Limit
The annual deduction limit does not have to be prorated according to the length of time an asset
is used during the year. The annual deduction limit applies to all tax entities entitled to use
Section 179. Thus, the annual limit applies separately to a partnership and to its individual
partners. The annual limit also applies separately to an S corporation and to its shareholders.5
Because the partnership and S corporation are conduit entities, a portion of the entity’s total
deduction is allocated to each owner, who subtracts it as an expense on the owner’s personal
tax return. However, the Section 179 deduction allocated to the taxpayer from the conduit entity
plus the taxpayer’s Section 179 deduction from all other sources cannot exceed the annual limit.
Any excess Section 179 election resulting from allocations from several entities must be carried
forward to be used in subsequent years.
EXAMPLE 4 Roberto is a 50% shareholder and full-time employee of an S corporation.
During 2009, the S corporation invests $324,000 in equipment qualifying for the
Section 179 deduction. Roberto also owns a sole proprietorship that constructs kitchen
cabinets. The cabinet business qualifies as an active business for Roberto. During
2009, he purchases $200,000 worth of equipment to use in his cabinet business. What
is the maximum amount that Roberto can deduct as a Section 179 expense for 2009?
Discussion: Roberto’s deductible Section 179 expenditures are limited to $250,000.
The S corporation can elect to deduct $250,000 of its $324,000 in capital expenditures.
The remaining $74,000 is subject to regular depreciation. The S corporation allocates
$125,000 (50% × $250,000) of its Section 179 deduction to Roberto. Thus, Roberto’s
qualified Section 179 expenditures total $325,000 ($125,000 from the S corporation +
$200,000 from the cabinet business). However, the $250,000 annual deduction limit
applies at the shareholder level as well as at the S corporation level. Therefore,
Roberto may elect to deduct only $250,000 as a Section 179 expense.
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A taxpayer may choose to use all, part, or none of the annual deduction. By electing to expense
less than the limit for a tax year, the taxpayer can avoid a Section 179 deduction carryforward
resulting from either the annual limitation or the trade or business income limitation.
EXAMPLE 5 Based on the information in example 4, how should Roberto allocate his
Section 179 deduction in 2009?
Discussion: Roberto should claim as a Section 179 deduction the $125,000 allocated
to him from the S corporation plus $125,000 of the cost of the equipment purchased for
use in the cabinet business. The remaining $75,000 cost of the equipment used in his
cabinet business is depreciated using regular depreciation methods.
If Roberto expenses the $200,000 worth of equipment he purchased for the
cabinet business, he will lose $75,000 of the deduction allocated to him from the S
corporation by exceeding the $250,000 annual limitation by $75,000 ($200,000 +
$50,000 = $250,000) this year. The $75,000 carries forward to be used in subsequent
years. Any amounts that flow to a taxpayer from a conduit entity should always be
expensed under Section 179 before any amount is elected from another trade or
business of the taxpayer.
After an asset’s basis is reduced by the amount expensed under Section 179, the remaining
basis is subject to regular depreciation under any valid method.
EXAMPLE 6 Devra Corporation purchases a machine costing $300,000 for use in its
business. Devra wants to expense $250,000 of the asset’s cost under Section 179. If
Devra makes the Section 179 election to expense $250,000 of the asset’s cost, what is
its depreciable basis in the machine?
Discussion: Devra’s depreciable basis for regular depreciation is $50,000. The
depreciable basis of the machine is its $300,000 cost, less the $250,000 it elects to
expense under Section 179. The reduction of depreciable basis by amounts expensed
under Section 179 is necessary to ensure that the total capital recovery on the machine
does not exceed the $300,000 invested.
The Section 179 deduction can be allocated to reduce the basis of qualifying assets in any
manner the taxpayer chooses. This allows the deduction to be allocated equally to all assets
acquired during the year or to specific assets. This option is important. Two general rules apply
to choosing assets to expense. First, do not use the Section 179 election to expense
automobiles. As discussed later, automobiles are subject to annual depreciation deduction
limits. For purposes of this annual limitation, the Section 179 expense is treated as a
depreciation deduction. Because MACRS depreciation on most automobiles exceeds the firstyear annual limitation amount, using the election to expense on an automobile does not result in
additional tax savings. Second, based on time value of money concepts, taxpayers should take
the depreciation deduction as early as possible. This is accomplished by expensing the assets
with the longest life and using regular depreciation methods to depreciate assets with the
shortest life.
EXAMPLE 7 Gwendolyn purchases equipment costing $250,000 and a computer system
that also costs $250,000 for use in her business in 2009. Under MACRS, the
equipment is 7-year property, and the computer system is 5-year property. How should
Gwendolyn allocate her $250,000 Section 179 expense deduction?
15
Discussion: If Gwendolyn wants to deduct the $250,000 maximum election to expense,
she should elect to expense the $250,000 cost of the equipment (7-year property). The
$250,000 cost of the computer system will be deducted over its 5-year life, resulting in
greater deductions sooner than if she elected to expense the computer.
Gwendolyn could elect to deduct less than the full $250,000 Section 179 limit. Because
Section 179 is elective, Gwendolyn can decide how much to deduct and the specific
assets to expense. This allows taxpayers who do not want or need the extra
deductions in the current year to spread the deductions out through depreciation
charges.
Annual Investment Limit
The annual deduction limit is reduced dollar for dollar by the amount of the investment in
qualifying property in excess of $800,000. As a result of this limitation, a taxpayer who
purchases $1,050,000 or more of qualified property during 2009 cannot expense any amount
under Section 179. Because of the $800,000 annual investment limitation, only relatively small
businesses can use the election to expense.
EXAMPLE 8 During 2009, the Allen Partnership places $828,000 of Section 179
property in service for use in its business. What is Allen’s maximum Section 179
deduction?
Discussion: Allen’s election to expense is reduced to $222,000 by the $800,000 annual
investment limit. Because the partnership invested $28,000 more than the $800,000
annual investment limitation ($828,000 - $800,000), it must reduce the annual
deduction limit dollar for dollar by the excess ($250,000 - $28,000 = $222,000). NOTE:
The $28,000 lost through the annual investment limit is not carried forward to future
years. It is lost forever.
Additional First-Year Depreciation
Taxpayers are allowed to claim an additional 50-percent depreciation deduction (bonus
depreciation) on qualified property acquired during tax years beginning in 2009. Qualifying
property is new MACRS property with a recovery period of 20 years or less, MACRS water
utility property, computer software not acquired as an acquisition of all of the assets of a
business, and qualified leasehold improvement property. The original use of the property must
be by the taxpayer and cannot be purchased from a related party. Property that must be
depreciated using the alternative depreciation system (ADS) does not qualify.
The original use requirement eliminates used property from qualifying for bonus depreciation.
Similarly, assets acquired as part of the acquisition of all the assets of a business will not meet
the original use requirement. However, any additional capital expenditures incurred to
recondition or rebuild otherwise qualifying property does satisfy the original use requirement and
therefore, is eligible for additional first-year depreciation.
To ensure that the capital recovery concept is not violated, the depreciable basis of the property
is reduced by the bonus depreciation for purposes of computing the regular MACRS
depreciation deduction.
EXAMPLE 11 Omer Corporation purchases $600,000 of new machinery on February
19, 2009. The machinery is 5-year MACRS property. What is the depreciable basis in
the machinery?
16
Discussion: MACRS property with a recovery period of 20 years or less qualifies for
the 50-percent additional depreciation deduction. Accordingly, Omer deducts $300,000
($600,000  50%) in bonus depreciation. Its depreciable basis in the machinery is
reduced to $300,000 ($600,000 - $300,000).
The additional first-year depreciation must be claimed on all eligible property unless a taxpayer
makes an election not to claim the deduction. The election is made on a class-by-class basis.
EXAMPLE 12 Assume that in Example 11, Omer Corporation does not want to claim
the additional first-year depreciation on the machinery. What is Omer’s depreciable
basis in the machinery?
Discussion: Omer must make an election not to claim the additional first-year
depreciation deduction. The election applies to all 5-year MACRS property that Omer
acquires in 2009. Omer’s depreciable basis in the machinery is $600,000 if it elects not
claim bonus depreciation on the machinery.
Any Section 179 expense election is claimed prior to calculation of the additional first-year
depreciation allowance. Therefore, the adjusted basis of the property is reduced by any Section
179 expense deduction for purposes of calculating the bonus depreciation.
EXAMPLE 13 Bomhoff Inc. purchases office equipment costing $400,000 on April 1,
2009. What is Bomhoff’s depreciable basis in the office equipment?
Discussion: To maximize the 2009 cost recovery deduction, Bomhoff should elect to
expense $250,000 of the cost of the office equipment. This reduces the adjusted basis
(and depreciable basis) of the equipment to $150,000 ($400,000 - $250,000). Office
equipment is 7-year MACRS property and is eligible for the bonus depreciation
deduction. Bomhoff deducts $75,000 ($150,000  50%) in additional first-year
depreciation. The depreciable basis is reduced to $75,000 ($150,000  $75,000 
$75,000).
Important points to remember about additional first-year depreciation:
■
To qualify for bonus depreciation, the property must be acquired during a tax year that
begins in 2009.
■
The original use of the property must commence with the taxpayer. Used property does
not qualify.
■
The 20 year or less recovery period requirement for qualifying property eliminates
residential rental property and nonresidential real property from receiving additional
first-year depreciation.
■
If a qualifying property is purchased, bonus depreciation must be claimed unless an
election not to claim the bonus depreciation is made. The election is made on a class
by class basis. Therefore, a taxpayer can claim the bonus depreciation on one or more
classes of property (eg, 10-year property) and not claim the bonus depreciation on
other classes of property (eg, 3-year property) acquired during the applicable period.
■
The depreciable basis must be reduced by any allowable bonus depreciation.
■
Unlike the Section 179 election to expense, there is no purchases limit nor is there an
annual income limit. That is, additional first-year depreciation can be deducted even if it
causes the business to have a net operating loss.
17
Basis Subject to Cost Recovery
Depreciable basis is the asset’s original basis for depreciation less any amounts deducted
under the Section 179 election to expense assets. Therefore, the basis rules discussed in
Chapter 9 provide the starting point for computing the capital recovery deduction. An asset’s
basis for depreciation does not have to be reduced by its salvage value. The depreciable basis
of an asset is the amount of basis that is subject to depreciation and is the amount used to
determine the annual depreciation deduction. The depreciable basis does not change during an
asset’s tax life unless additional capital expenditures are made for the asset. The total capital
recovered as a depreciation deduction over an asset’s useful life may never be more than its
depreciable basis. Do not confuse the term depreciable basis with adjusted basis. Adjusted
basis refers to the unrecovered capital of an asset at any point in time. An asset’s adjusted
basis decreases as cost recovery deductions are taken. The capital recovery under MACRS
does not necessarily relate to the true remaining useful life and salvage value of the asset. That
is, an asset’s depreciable basis can be fully recovered, even though the asset remains in
service and salvage value exists.
EXAMPLE 14 In 2009, Estelle Corporation purchases office equipment costing
$280,000 for use in its repair business. Because equipment is eligible to be expensed
under Section 179, Estelle elects to expense $250,000 of the cost of the equipment.
What is Estelle Corporation’s depreciable basis in the equipment?
Discussion: Estelle’s initial basis in the equipment is $280,000. The election to expense
reduces the depreciable basis to $30,000 ($280,000 - $250,000). Unless Estelle elects not
to claim the additional first-year depreciation, it deducts $15,000 ($30,000  50%) in
additional first-year depreciation. This reduces the depreciable basis to $15,000 ($30,000 $15,000). The corporation recovers its $280,000 investment in the equipment through
expensing $250,000 in the year of purchase, $15,000 in additional first-year depreciation
deducted in the year of purchase, and $15,000 in depreciation charges over the life of the
equipment.
If the office equipment had cost only $100,000 and Estelle elected to expense the
entire $100,000 cost under Section 179, the corporation would fully recover its capital
investment in 2009. The depreciable basis in the equipment then is zero, and the
corporation is allowed no further capital recovery deductions on its initial $100,000
investment. However, the equipment remains in service and may provide several years
of quality use.
Depreciation Method Alternatives
Under current tax law, taxpayers have three alternatives for calculating depreciation:
■
Regular MACRS
■
Straight-line over the MACRS recovery period
■
Straight-line over the Alternative Depreciation System (ADS) recovery period
18
Figure 10–2 illustrates these choices for depreciating personal property. A taxpayer decides
which to use by first choosing whether to maximize or minimize the depreciation deduction in
the year of acquisition. The taxpayer would maximize by using the Section 179 election,
claiming the additional first-year depreciation, and using regular MACRS for the remaining
depreciable basis. Regular MACRS depreciates property in the 3-, 5-, 7-, and 10-year classes
using the 200-percent declining balance method with an optimal, automatic switch to straightline in the IRS percentage tables. Assets in the 15- and 20-year classes are depreciated using
the 150-percent declining balance method. The taxpayer who needs a slower depreciation rate
can minimize the deduction by using straight-line (S-L) MACRS or ADS. Because of the longer
recovery period, ADS produces the smallest depreciation deduction. Taxpayers will need to
elect not to claim additional first-year depreciation to secure the smallest depreciation
deduction.
EXAMPLE 22 On March 14, 2009, Lorange Mining company purchases a bus costing
$400,000 to transport its employees from the parking area to the mines. What should
Lorange do if it wants to recover its $400,000 cost as quickly as possible (i.e.,
maximize the cost recovery)?
Discussion: To maximize cost recovery, Lorange should elect to expense $250,000 of
cost under Section 179 and claim the 50 percent additional first-year depreciation. The
additional first-year depreciation is $75,000 [($400,000 - $250,000) × 50%], leaving a
depreciable basis of $75,000 ($150,000 − $75,000), which would be recovered using
the regular MACRS 200% declining balance method over the 5-year recovery period
for buses. The recovery period is found in Table A10–1 under the column labeled
General Depreciation System. The regular MACRS method (using Table 10–4)
provides the fastest depreciation write-off for the property’s depreciable basis:
Initial basis
Section 179 election
Adjusted basis
Additional first-year depreciation
$150,000 × 50%
Depreciable basis
MACRS% (Table 10–4)
2009 depreciation
$ 400,000
(250,000)
$ 150,000
Maximum cost recovery
$340,000 ($250,000 + $75,000 + $15,000)
(75,000)
$ 75,000
×
20%
$ 15,000
EXAMPLE 23 Assume that in example 22, Lorange wants to recover the $400,000 cost
as slowly as possible (i.e., minimize the cost recovery). Which options should Lorange
elect?
Discussion: The slowest cost recovery is obtained by not using Section 179 and
electing to use straight-line depreciation over the ADS life of the property. The ADS
recovery period is always greater than or equal to the MACRS recovery period. Table
A10–1 shows that the ADS recovery period is 9 years for buses. Remember that the
MACRS recovery period is 5 years. Thus, the use of the ADS life generally stretches
the depreciation deductions over a longer period, thereby diminishing the deduction
amounts for each year in the recovery period:
Depreciable basis
$400,000
Full-year S-L deduction ($400,000 ÷ 9) $ 44,444
Mid-year convention
×
½
First-year depreciation
$ 22,222
19
Limitation on Passenger Autos
Passenger autos are subject to a limitation on the annual amount of the deductible depreciation.
The annual depreciation deduction for a passenger automobile cannot exceed a specified
amount, which is based on the year a car is placed in service. Any depreciation that is
disallowed because of the annual limitations may be deducted when the auto’s recovery period
ends. Table A10–10 lists the auto depreciation tables and the annual auto limits that are allowed
for 100-percent business use of an auto placed in service in 2008. If an auto is not used wholly
for a business purpose, the amount of the annual passenger automobile limitation must be
reduced by multiplying it by the business use percentage. The depreciation subject to the firstyear annual limitation includes any amount that is expensed using Section 179. As mentioned
earlier, the annual limitation on the auto depreciation deduction makes it impractical to deduct
any of the cost of an auto under Section 179.
The maximum first-year depreciation deduction on a passenger automobile is $2,960 for
automobiles ($3,160 for trucks and vans) placed in service in 2009. The maximum first-year
depreciation deduction on new automobiles that qualify for additional first-year depreciation
increases by $8,000 for automobiles placed in service in tax years beginning in 2008. To take
advantage of the increased cap, additional first-year depreciation must be claimed  the
increased maximum is not available if a taxpayer makes an election not to take the additional
first-year depreciation.
EXAMPLE 29 On July 5, 2008, Oscar purchases a new car for $40,000. Based on his
mileage records, Oscar uses the car 80% of the time for a qualified business use. What
is his depreciation deduction on the car for 2008?
Discussion: Automobiles are 5-yearMACRS property. Because he uses the automobile
more than 50% of the time for business, his allowable depreciation is the lesser of the
regular MACRS depreciation or the passenger automobile limitation. Oscar’s 2008
depreciation is limited to $8,768:
Regular MACRS Depreciation
Initial Basis
Business use percentage
Business depreciable basis
Additional first-year depreciation percentage
Additional first-year depreciation
$40,000
 80%
$32,000
 50%
$16,000
MACRS depreciable basis - $32,000 - $16,000
MACRS table percentage
MACRS depreciation
$16,000
 20%
$ 3,200
Total 2008 MACRS depreciation ($16,000  $3,200) $19,200
Passenger Automobile Limitation
Annual depreciation limit for an automobile
placed in service in 2008
Additional first-year allowance in 2008
2008 automobile depreciation limit
Business use percentage
Oscar’s maximum 2008 depreciation on auto
$ 2,960
8,000
$10,960
 80%
$ 8,768
20
Two things should be noted regarding passenger automobiles. First, to qualify for the additional
first-year depreciation deduction, the automobile must be a new automobile  used property
does not qualify. Second, to qualify for MACRS depreciation, the automobile must be
predominantly used in a qualified business use (i.e., more than 50 percent trade or business
use). If the predominant use test is not met, the automobile must be depreciated using the
alternative depreciation system (ADS) and therefore, is not eligible for additional first year
depreciation.
Problems
25. Firefly, Inc., acquires business equipment in July 2009 for $815,000.
a. What is Firefly's maximum Section 179 deduction for 2008? Explain.
b. What happens to any portion of the annual limit not deducted in 2008?
Explain.
c. What is the depreciable basis of the equipment? Explain.
30. Jennifer owns a 40% interest in the Thomas Partnership. She also owns
and operates an architectural consulting business. During the current year,
the partnership purchases $260,000-worth of property qualifying under
Section 179 and elects to expense $250,000.
Jennifer purchases
$180,000-worth of qualifying Section 179 property for use in her
architectural consulting business. Write a letter to Jennifer explaining what
she should do to maximize her cost recovery.
40. The Browser Company purchases a mainframe computer in March 2009 for
$120,000. This is the only depreciable personal property acquired during the
year. The company does not elect to expense the asset but wants to claim
the maximum depreciation. In May 2012, the company sells the computer.
Calculate the adjusted basis of the computer at the date of sale.
43. Dikembe purchases 4,000 breeding hogs for $320,000 in April 2009.
a. What is his maximum 2009 cost-recovery deduction for the hogs?
b. Dikembe's farming operation incurs a net loss this year and probably will
next year before taking the cost recovery into consideration. What should
Dikembe do in regard to his cost-recovery deductions?
21
44. Rograin Corporation purchases turning lathes costing $670,000 and a bus
costing $280,000 in June of the current year. The lathes are 7-year
MACRS property, and the bus is 5-year MACRS property.
a. What is Rograin's maximum Section 179 deduction?
b. Assuming that Rograin deducts the maximum Section 179 expense, what
are the depreciable basis of the lathes and the bus?
c. If Rograin wants to maximize its cost recovery this year, how much firstyear depreciation may it deduct in addition to the Section 179 deduction?
45. Baker, Inc., purchases office furniture (7-year MACRS property) costing
$280,000 and a computer system (5-year MACRS property) costing
$280,000 in 2009. What is Baker's maximum cost-recovery deduction in
2009? (Hint: Maximize the Section 179 election effect.)
48. The Gladys Corporation buys office equipment costing $290,000 on May
12, 2009. In 2012, new and improved models of the equipment make it
obsolete, and Gladys sells the old equipment for $34,000 on December 27,
2012.
a. What is Gladys Corporation's gain or loss on the sale assuming that Gladys
takes the maximum cost-recovery deduction allowable on the equipment?
b. What is Gladys Corporation's gain or loss on the equipment assuming that
Gladys takes the minimum cost-recovery deduction allowable on the
equipment?
55. On June 1, 2008, Kirsten buys an automobile for $42,000. Her mileage log
for the year reveals the following: 20,000 miles for business purposes; 7,000
miles for personal reasons; and 3,000 miles commuting to and from work.
What is Kirsten's maximum cost-recovery deduction for 2008?
49. In June of 2009, Copper Kettle, Inc., purchases duplicating equipment for
$350,000.
a. Compare cost recovery deductions using maximum, minimum, and
intermediate methods over the recovery period of the equipment.
b. Explain why Copper Kettle, Inc., would elect to use each of these methods.
22
Chapter 11
Capital Gain Exclusion on Qualified Small Business Stock
To encourage investment in small businesses, 50 percent of the gain (not reduced by
capital losses) from qualified small business stock that is held more than five years is
excluded from taxation. The remaining gain is taxed at a maximum rate of 28 percent; it
is not eligible for the 15 percent long-term capital gains rate. The AART increases the
percentage exclusion for qualified small business stock to 75 percent for stock acquired
after February 17, 2009 and before January 1, 2011. The effect of this provision is to
limit the marginal tax rate on such gains to 7% (25% of gain taxed x 28% maximum tax
rate).
EXAMPLE 18 Isabell purchases 1,000 shares of qualified small business stock on
November 18, 2009. On December 20, 2014, she sells the 1,000 shares at a gain of
$120,000. What is the effect of the sale on Isabel’s tax liability, assuming that she has
no other capital asset transactions and is in the 35% marginal tax bracket?
Discussion: Because the qualified small business stock was held for more than five
years and acquired after February 17, 2009 and before January 1, 2011, Isabel
excludes 75% of the gain, $90,000 from her capital gain income. Because she has no
other capital gains or losses, her net capital gain position is a net long-term capital gain
of $30,000 ($120,000 - $90,000). The gain is taxed at the 28% maximum rate for gains
on qualified small business stock, resulting in a tax liability of $8,400 ($30,000 x 28%).
Note that the tax on the gain is 7% of the total gain ($8,400 ÷ $120,000 = 7%).
EXAMPLE 19 Assume the same facts as in example 18, except that Isabel has a net
capital loss of $20,000 from her other capital asset transactions. What is the effect of
the sale of the stock on Isabel’s tax liability?
Discussion: The 75% exclusion is taken before the capital gain-and-loss netting.
Therefore, Isabel is entitled to an exclusion of $90,000. The $30,000 long-term capital
gain that remains after the exclusion is netted against the $20,000 capital loss,
resulting in a net long-term capital gain of $10,000. Isabel’s tax on the $10,000 net
long-term capital gain is $2,800 ($10,000 x 28%).
23
Problems
7.
What is (are) the current tax advantage(s) of selling an asset at a long-term capital
gain?
9.
Under what conditions may a taxpayer exclude a portion of a realized capital
gain?
48. Yorgi purchases qualified small business stock in Gnu Company, Inc., on
September 15, 2009, for $50,000. She sells the shares for $400,000 on
December 30, 2014. The stock retains its qualified small business status
through the date of the sale.
a. Determine the amount of realized and recognized gain on the sale.
b. What is Yorgi's effective tax rate on this transaction? (Assume her marginal
tax rate is 33%.)
49. Return to the facts of Problem 48. Assume that Yorgi has a net capital loss
of $80,000 from her other capital asset transactions in 2014. What is the
effect of the sale of the stock on Yorgi’s tax liability if her marginal tax rate is
33%.
24
Chapter 15
Alternative Minimum Tax Exemptions
After making all the required adjustments and adding the preference items to taxable
income, the result is the tentative alternative minimum taxable income. In determining
the AMTI tax base, an exemption amount is allowed as a reduction in of the tentative
AMTI. The exemption is designed to eliminate taxpayers with relatively moderate
amount of taxable income who do not have significant amount of adjustments and/or
preferences from the AMT. The exemption amount starts at a tentative amount based
on the type of taxpayer and then is reduced by 25 percent of every dollar by which the
tentative AMTI exceeds a specified level.
The AART increases the exemption amount for individuals for 2009. The 2009
exemption amounts for individuals are:
•
•
•
$70,950 for married taxpayers filing jointly and surviving spouses
$46,700 for unmarried taxpayers
$35,475 for married taxpayers filing separately
The $40,000 corporate exemption amount and the exemption phase-out ranges were
not increased.
25
Problems
36.
What is the AMT exemption amount? Is it available to all taxpayers?
79. Alice and Frank had the following items on their current-year tax return:
Adjusted gross income
Less: Deductions from adjusted gross income
Medical expenses
$ 7,950
Less: 7.5% x $100,000
(7,500)
Home mortgage interest
Home equity loan interest
State income taxes
Property taxes
Charitable contributions (cash)
Miscellaneous itemized deductions
$ 2,400
Less: 2% x $100,000
(2,000)
Less: Exemptions (2 x $3,650)
$100,000
$
450
5,300
1,200
2,325
950
575
400
(11,200)
(7,300)
Determine the amount of the adjustments that Alice and Frank will have to
make in computing their alternative minimum tax.
80. Joan and Matthew are married, have two children, and report the following
items on their current year’s tax return:
Adjusted gross income
Less: Deductions from adjusted gross income
Medical expenses
$14,000
Less: 7.5% x $158,000
(11,850)
Home mortgage interest
Home equity loan (for college education)
State income taxes
Property taxes
Charitable contributions
Miscellaneous itemized deduction
$ 4,000
Less: 2% x $158,000
(3,160)
Total Itemized deductions
Less: Exemptions (4 x $3,650)
$158,000
$ 2,150
13,500
9,000
11,000
6,500
7,000
840
(49,990)
(14,600)
Determine Joan and Matthew's regular tax liability and, if applicable, the
amount of their alternative minimum tax. Write a memo to Joan and
Matthew explaining the adjustments they will have to make in computing
their alternative minimum tax.
26
82. Determine the AMT exemption amount for each of the following taxpayers:
a. Nominal Corporation has an alternative minimum taxable income of
$140,000.
b. Janine is a single individual with an alternative minimum taxable income of
$155,000.
c. Jagged Corporation has an alternative minimum taxable income of
$220,000.
d. Peter and Wendy have an alternative minimum taxable income of $110,000.
e. Popup Corporation has an alternative minimum taxable income of
$900,000.