CHAPTER 12
CHAPTER 15
ALTERNATIVE MINIMUM TAX
SOLUTIONS TO PROBLEMS MATERIALS
| | | | |Status: | | Q/P |
|Question/ | | | |Present | | in Prior |
|Problem | |Topic | |Edition | |Edition |
| | | | | | |
|1 | |AMT purpose | |Unchanged |1 |
|2 | |AMTI: direct versus indirect calculation approach | |Unchanged |2 |
|3 | |AMT adjustments versus tax preferences | |New | |
|4 | |Tax preferences | |Modified |4 |
|5 | |Tax preferences | |Unchanged |5 |
|6 | |AMT formula | |Unchanged |6 |
|7 | |Regular income tax liability versus AMT | |Unchanged |7 |
|8 | |AMT exemption amount | |Unchanged |8 |
|9 | |AMT rates | |New | |
|10 | |AMT and nonrefundable tax credits | |Unchanged |10 |
|11 | |AMT adjustment for cost recovery on personalty | |New | |
|12 | |AMT adjustment for mining exploration and development costs | |Unchanged |12 |
|13 | |Issue ID | |Unchanged |13 |
|14 | |Long-term contract income adjustment | |Unchanged |14 |
|15 | |Incentive stock options adjustment | |Modified |15 |
|16 | |Regular income tax adjusted basis versus AMT adjusted basis | |Unchanged |16 |
|17 | |Issue ID | |Modified |17 |
|18 | |Passive activity losses AMT adjustment | |Unchanged |18 |
|19 | |ATNOLD | |Unchanged |19 |
|20 | |AMT and itemized deductions | |Unchanged |20 |
|21 | |Issue ID | |Unchanged |21 |
|22 | |AMT cutback adjustment | |Unchanged |22 |
|23 | |AMT and interest | |Unchanged |23 |
|24 | |AMT and personal and dependency exemptions and standard deduction | |New | |
|25 | |Percentage depletion preference | |Unchanged |25 |
|26 | |Private activity bond preference | |Unchanged |26 |
|27 | |Purpose of AMT credit | |Unchanged |27 |
|28 | |Corporate versus noncorporate AMT | |New | |
|29 | |Effect of ACE adjustment on financial and tax accounting | |Unchanged |29 |
|30 | |AMT planning on recognition of income | |Unchanged |30 |
|* 31 | |AMT base | |Modified |31 |
|* 32 | |AMT calculation | |Modified |32 |
|* 33 | |AMT calculation | |Modified |33 |
|* 34 | |AMT exemption amount | |Modified |34 |
|* 35 | |AMT and nonrefundable credits | |Unchanged |35 |
| 36 | |AMT adjustments: circulation expenditures | |Modified |36 |
|* 37 | |Adjustments for circulation expenditures | |Unchanged |37 |
|* 38 | |Cost recovery adjustment for AMT: realty | |New | |
|39 | |Cost recovery adjustment for AMT: personalty | |Modified |39 |
|40 | |Mining and exploration costs adjustment | |Unchanged |40 |
|* 41 | |AMT adjustment for long-term contract | |Unchanged |41 |
|* 42 | |Incentive stock option adjustment | |Unchanged |42 |
|43 | |Adjustments for incentive stock options | |Unchanged |43 |
|* 44 | |AMT adjustments: adjusted gain or loss | |New | |
|45 | |Computing AMT passive loss | |Unchanged |45 |
|46 | |Itemized deductions adjustment for AMT and medical expenses | |Unchanged |46 |
|* 47 | |AMT adjustments for itemized deductions | |Unchanged |47 |
|* 48 | |Mortgage interest adjustment for AMT | |Unchanged |48 |
|49 | |Adjustment for investment interest and private activity bond preference | |Unchanged |49 |
|* 50 | |Itemized deductions adjustment for AMT | |Unchanged |50 |
|51 | |AMT standard deduction and personal exemption adjustments | |Modified |51 |
|52 | |AMT percentage depletion preference | |Unchanged |52 |
|* 53 | |AMT IDC preference | |Unchanged |53 |
|54 | |Tax preference items and AMT adjustments including private activity bonds| |Unchanged |54 |
|* 55 | |Comprehensive AMT calculation | |Modified |55 |
|* 56 | |AMT calculation | |Unchanged |56 |
|* 57 | |Computation of taxable income and AMT | |Unchanged |57 |
|* 58 | |Computation of taxable income and AMT | |Modified |58 |
|* 59 | |AMT tax credit carryover | |Unchanged |59 |
|* 60 | |Exemption from corporate AMT for small corporations | |Modified |60 |
|* 61 | |ACE adjustment | |Unchanged |61 |
|* 62 | |Corporate AMT | |Unchanged |62 |
|* 63 | |Corporate AMT | |Modified |63 |
|* 64 | |Cumulative | |Modified |64 |
|* 65 | |Cumulative | |Modified |65 |
*The solution to this problem is available on a transparency master.
| | | | |Status: | | |
|Research | | | |Present | | |
|Problem | |Topic | |Edition | | |
| | | | | | |
|1 | |Tax preference: pre-1987 depreciation | |New | |
|2 | |AMT and Form 6251 | |New | |
|3 | |Internet activity | |New | |
CHECK FIGURES
31. $196,625.
32.a. $30,328.
32.b. $61,355.
33. Case 1: MFJ $35,607; single $29,342.
Case 2: MFJ $16,607; single $10,342.
34. Case 1: Single $30,875; MFJ $58,000; MFS $10,250.
Case 2: Single $5,875; MFJ $33,000; MFS $0.
Case 3: Single $0; MFJ $0; MFS $0.
35.a. $0.
35.b. $78,000.
36. Expensing saves $29,067; amortizing saves $34,440.
37. 2004 positive $90,000; 2005 negative $5,000.
38.a. $2,087 positive adjustment for Forsythia Acres.
38.b. $2,386 positive adjustment for Forsythia Acres; $0 for SquareOne.
39.a. $15,000 positive.
39.b. Elect 150% DB method.
40.a. $540,000 positive adjustment for 2004.
40.b. Amortize expenditures over 10 years.
41. $120,000 positive adjustment for 2004; $120,000 negative adjustment for 2005.
42.a. No reporting required in 2004.
42.b. No reporting required in 2008.
42.c. Positive adjustment of $30,000 for AMT in 2009.
42.d. Regular income tax recognized gain of $80,000; AMT recognized gain of $50,000.
43. $27,000 positive AMT adjustment in 2004; $27,000 negative AMT adjustment in 2005.
44.a. Regular income tax recognized gain of $268,000 on the building.
44.b. AMT recognized gain of $235,000 on the building.
44.c. Negative AMT adjustment of $33,000.
45. No deduction; $11,750 suspended regular tax; $3,000 suspended AMT.
46.a. $14,500.
46.b. $9,500.
46.c. $5,000 positive.
47.a. $14,500.
47.b. $8,500 positive.
48. $5,000 positive.
49. Regular income tax $10,000; AMT $11,500.
50.a. $17,450 positive.
50.b. $17,450 positive and $1,100 tax preference.
51. $223,950.
52. $9,000 tax preference.
53. $24,000.
54. $51,950.
55. $76,600 taxable income; $24,180 tentative AMT.
56. $17,961.
57.a. $125,950.
57.b. $35,281.
58. Regular income tax is $32,091 and AMT is $39,358.
59. $64,965.
60.a. Exempt initially from AMT as a “small corporation” in 1998.
60.b. No.
61. 2003 $750 positive; 2004 $750 positive; 2005 $1,500 negative.
62. Quincy $22,000; Redland $24,500; Tanzen $64,000.
63.a. $884,000.
63.b. AMTI $4,690,000; tentative AMT $938,000.
63.c. AMT $54,000.
64. $1,113 regular tax liability plus $18,238 AMT.
65. $38,529 regular tax liability plus $10,846 AMT.
DISCUSSION QUESTIONS
1. Through the use of exclusions, deductions, and credits, the regular income tax liability can be reduced or eliminated. Congress felt that some taxpayers with substantial economic incomes were taking undue advantage of these tax reduction opportunities and thereby were concerned about the inequality that resulted. Therefore, the AMT was enacted. p. 15-2
2. Starting with taxable income in calculating the AMT is the indirect approach. This is the approach normally used and the one followed in Form 6251. However, the AMT also can be calculated using the direct approach.
Gross income computed by applying the AMT rules
Minus: Deductions computed by applying the AMT rules
Equals: AMTI before tax preferences
Plus: Tax preferences
Equals: AMT income
Minus: Exemption
Equals: AMT base
Times: Rates
Equals: Tentative AMT before foreign tax credit
Minus: AMT foreign tax credit
Equals: Tentative AMT
Minus: Regular income tax liability before credits other than the foreign tax credit
Equals: AMT
Note that both approaches produce the same amount of AMT. pp. 15-3 to 15-5 and Figure 15-1
3. Tax preferences are always positive. Through the use of tax preferences, the AMT is designed to take back part or all of the tax benefits of certain exclusions or deductions allowed to taxpayers for regular income tax purposes.
AMT adjustments can be both positive and negative. Most, although not all, AMT adjustments are timing differences in the treatment for regular income tax purposes and AMT purposes. As such, the adjustments will reverse and eventually net to zero.
pp. 15-4 to 15-6
4. a., d., and e. are tax preferences for the AMT. p. 15-6
5. d. and e. are tax-preferences for the AMT. a. and b. are neither an AMT adjustment nor a tax preference. c. is an AMT adjustment. pp. 15-4 to 15-6
6. The AMT tax formula is as follows:
Regular taxable income
Plus or minus: Adjustments
Equals: Taxable income after AMT adjustments
Plus: Tax preferences
Equals: Alternative minimum taxable income
Minus: AMT exemption
Equals: Alternative minimum tax base
Times: 26% or 28% rate
Equals: Tentative AMT before foreign tax credit
Minus: Alternative minimum tax foreign tax credit
Equals: Tentative minimum tax
Minus: Regular tax liability*
Equals: Alternative minimum tax (if amount is positive)
*Regular tax liability for the year reduced by any allowable foreign tax credit.
Figure 15-2
7. The statement is incorrect. There is an AMT liability only if the tentative AMT exceeds the regular income tax liability. The amount of the excess is the AMT. The total tax liability is the summation of the regular income tax liability and the AMT. p. 15-9
8. a. The AMT exemption can be thought of as a materiality amount. It relieves taxpayers who do not have substantial adjustments and preferences from the burden of the AMT.
b. The initial amount (prior to the phaseout) of the exemption is as follows:
• $40,250 for a single taxpayer.
• $58,000 for married taxpayers filing jointly.
• $29,000 for married taxpayers filing separately.
c. The phaseout of the exemption amount is an application of the wherewithal to pay concept. As the ability to pay increases as measured by the taxpayer’s AMTI, the justification for relieving the taxpayer of the burden of the AMT decreases.
p. 15-8
9. There are two AMT rates for the individual taxpayer. The rates are multiplied by the AMT base to produce the tentative AMT (before foreign tax credit). The 26% rate applies to the first $175,000 ($87,500 for married filing separately) of the AMT base, and the 28% rate applies to the excess over $175,000. If the individual taxpayer has net capital gain, the alternative tax rate that is used in the regular tax liability calculation is also available for AMT purposes. p. 15-8
10. Historically the answer was no. Only the foreign tax credit could reduce the regular income tax liability below the amount of the tentative AMT. However, now certain nonrefundable personal credits (e.g., child tax credit, adoption expenses credit, credit for elective deferrals and IRA contributions) are permitted to offset both the regular income tax liability and the AMT. p. 15-9
11. Since Tad placed the machinery in service prior to January 1, 1999 (and assuming it was depreciated under MACRS rather than ADS), a positive AMT adjustment for depreciation is required in 1998 and a negative AMT adjustment in 2004. For most personal property placed in service after 1986 (MACRS property), the MACRS deduction for regular income tax purposes is based on the 200% declining-balance method with a switch to straight-line when that method produces a larger depreciation deduction. For AMT purposes, the taxpayer must use ADS for such property placed in service before January 1, 1999. ADS is based on the 150% declining-balance method with a similar switch to straight-line. Thus, the MACRS deduction for personal property is larger than the ADS deduction in the early years of an asset’s life (e.g., 1998). Conversely, the ADS deduction is larger than the MACRS deduction in the later years (e.g., 2004). pp. 15-11 and 15-12
12. For regular income tax purposes, mining exploration and development costs may be expensed in the year incurred. For AMT purposes, such costs must be amortized over 10 years. The AMT adjustment for mining exploration and development costs is equal to the amount expensed minus the amount that would have been allowed if the costs had been capitalized and amortized ratably over a 10-year period. The AMT adjustment can be avoided if the taxpayer elects to write off the costs over a 10-year period for regular income tax purposes. pp. 15-12 and 15-13
13. Rick may be misinformed regarding the AMT. Merely because the AMT exemption amount is zero and there are adjustments or tax preferences present does not automatically mean an AMT will result. What Rick needs to do is to determine if an AMT (and the amount) would result if he expenses the mining exploration and development costs for regular income tax purposes. pp. 15-8 and 15-13
14. For a long-term contract, taxpayers are required to use the percentage of completion method for AMT purposes. If a taxpayer uses the completed contract method for regular income tax purposes, this will give rise to an AMT adjustment equal to the difference between income reported under the percentage of completion method and the amount reported using the completed contract method. The adjustment can be either positive or negative depending on the amount of income recognized under the different methods. p. 15-13
15. a. If Megan exercises the incentive stock option (ISO), she will have an AMT adjustment of $7,000 [($60 fair market value – $25 option price) X 200 shares] in the first taxable year in which the rights in the stock are freely transferable or are not subject to a substantial risk of forfeiture. She will not be required to recognize any income for regular income tax purposes as a result of exercising the ISOs. For AMT purposes, the basis of such stock is equal to the fair market value taken into account in determining the adjustment. Examples 10 and 11 and related discussion
b. Yes. If Megan exercises the option and disposes of the stock in the same tax year, there is no AMT adjustment. p. 15-14
16. The regular income tax adjusted basis for the building is determined by subtracting the regular income tax depreciation deductions. The AMT adjusted basis for the building is determined by subtracting the AMT depreciation deductions. Since the regular income tax and the AMT depreciation deductions are not the same for a building placed in service before January 1, 1999, the adjusted basis for regular income tax and AMT purposes will differ. Consequently, the recognized gain or loss for regular income tax and AMT purposes will also differ. pp. 15-14 to 15-16
17. The relevant issues are the tax consequences of each of the two proposed transactions for both regular income tax purposes and for AMT purposes. The AMT analysis is relevant only if the AMT applies since the adjustment would be negative. For regular income tax purposes, the sale to Abby in 2005 would result in deferring the reporting of the gain of $85,000 until 2005. This deferral treatment also would apply for AMT purposes (i.e., the realized loss of $10,000 cannot be recognized). If the sale occurred in 2004 to Ed, for regular income tax purposes, the $85,000 realized gain is recognized. However, for AMT purposes, there would be a $95,000 negative adjustment for the difference between the $85,000 gain for regular income tax purposes and the $10,000 loss for AMT purposes. Note also that for regular income tax purposes, any portion of the $85,000 recognized gain that is classified as ordinary income will be subject to a lower tax rate in 2004 (25%) than in 2005 (28%). pp. 15-14 to 15-16
18. Income or loss from passive activities is computed differently for regular income tax purposes and for AMT purposes. For example, the depreciation and depletion rules differ for regular income tax and AMT purposes. The resulting difference in net income (loss) could require an AMT adjustment. pp. 15-16, 15-17, and Example 15
19. Positive adjustments and tax preferences are added to the regular income tax NOL in calculating the ATNOLD (i.e., making the ATNOLD a smaller amount). Negative adjustments are subtracted from the regular income tax NOL in calculating the ATNOLD. p. 15-17
20. The tax treatment for regular income tax and AMT purposes is the same for the following:
Casualty losses
Charitable contributions
A deduction for state income taxes, miscellaneous itemized deductions subject to the 2% floor, and real estate taxes is not permitted for AMT purposes. While a deduction is permitted for medical expenses for AMT purposes, the floor is 10% of AGI rather than the 7.5% floor.
pp. 15-17 to 15-19
21. The obvious issue is whether Matt should follow the friend’s advice in order to increase his itemized deductions. On the surface, this appears to be sound tax advice. Factoring in the effect of indexing on the standard deduction, it appears that Matt may have to use it in the future. Incurring the mortgage on the beach house would enable him to continue to itemize deductions. However, another issue that needs to be addressed is whether Matt will be subject to the AMT. The mortgage interest on the beach house will be deductible for AMT purposes, since it is qualified housing interest. In addition, determination needs to be made of whether the tax-exempt bonds in which Matt is investing are private activity bonds, since the interest on such bonds is a tax preference. pp. 15-19 and 15-22
22. The purpose of the cutback adjustment for regular income tax purposes is to partially phase out the deduction for itemized deductions for high income taxpayers (i.e., AGI exceeds a threshold amount). The AMT calculation takes a different approach by disallowing certain itemized deductions (e.g., state income taxes, property taxes) and by reducing the amount of others (e.g., medical expenses, qualified housing interest versus qualified residence interest). There is no cutback adjustment in calculating the AMT. Since the starting point for calculating the AMT is taxable income, there is a negative adjustment for the amount of the cutback adjustment in calculating AMTI. p. 15-18
23. The interest deduction for regular income tax purposes includes qualified residence interest, investment interest to the extent of net investment income reported in computing taxable income, and qualified interest on student loans (i.e., a deduction for AGI). The alternative minimum tax itemized deduction for interest includes qualified housing interest, plus other interest to the extent of qualified net investment income that is included in the AMT base, and qualified interest on student loans. Qualified housing interest could be less than qualified residence interest. pp. 15-19 and 15-20
24. A taxpayer who does not itemize is required to make an adjustment (positive) for the standard deduction. The adjustment is required because the standard deduction is not allowed for AMT purposes and the starting point for AMT is taxable income. Similarly, a positive adjustment is required for personal and dependency exemptions in calculating AMTI. pp. 15-20 and 15-21
25. A tax preference is created for AMT purposes once the adjusted basis of the mineral deposit is reduced to $0 and percentage depletion continues to be deducted. p. 15-21
26. For regular income tax purposes, the $18,000 of interest income is excludible from gross income and the $7,000 of interest expense is not deductible. For AMT purposes, interest earned on private activity bonds is included in AMTI. Interest incurred in purchasing or carrying such bonds is offset against the interest income. Also, for AMT purposes, the interest earned (net of any related expenses) on private activity bonds is included in the calculation of net investment income in calculating the investment interest deduction. p. 15-22
27. The purpose of the AMT credit is to provide equity for the taxpayer when timing differences that give rise to AMT adjustments reverse. The credit arises when positive adjustments are included in the AMT base. It is used to reduce the regular income tax liability for prior years’ AMT liability attributable to timing differences.
To determine the amount of the AMT credit, it is necessary to compute the AMT with timing adjustments and AMT exclusions (non-timing adjustments and preferences) included in the AMT base. The AMT credit carryover is the difference between the amount so computed and the AMT that would result without including timing adjustments in the AMT base. The AMT credit may be carried over indefinitely. Examples 29 to 31 and related discussion
28. To be exempt from the AMT, a corporation must be a “small corporation.” A corporation is classified as a small corporation if it had average annual gross receipts of less than $5 million for the three-year period beginning after December 31, 1993. A corporation will continue to be classified as a small corporation if its average annual gross receipts for the three-year period preceding the current tax year and any intervening three-year periods do not exceed $7.5 million. However, if a corporation ever fails the gross receipts test, it is ineligible for small corporation classification in future tax years. Note that a corporation will automatically be classified as a small corporation in the first year of existence. p. 15-27
29. Through the ACE adjustment, Congress is indirectly imposing a conformity requirement on corporations. While a corporation may still choose to use different methods for tax and financial accounting purposes, it may no longer be able to do so without the possibility of incurring AMT as a result of the ACE adjustment. Thus, a corporation may incur AMT not only because of specifically targeted adjustments and preferences, but also as a result of any methods that cause adjusted current earnings to exceed AMTI before the ACE adjustment. pp. 15-28 to 15-30
30. Situations can arise when it would be advisable for a taxpayer to accelerate income into an AMT year. A 28% to 35% taxpayer who is subject to the AMT in the current year should consider accelerating income into the AMT year so the income will be taxed at a 26% or 28% rate. For example, collectibles that produce long-term capital gain can be sold in the AMT year, exposing the gain to a possible 26% rate, rather than the 28% alternative capital gains rate that might otherwise apply. Examples 36 and 37 and related discussion
PROBLEMS
31. Rachel’s taxable income $162,000
Plus: Positive AMT adjustments 95,000
Tax preferences 35,000
Less: Negative AMT adjustments (80,000)
Equals: AMTI $212,000
Less: Exemption [$40,250 – 25%($212,000 – $112,500)] (15,375)
Equals: AMT base $196,625
pp. 15-4 to 15-8
32. a. Calculation of regular income tax liability:
Tax on $130,000:
On $70,350 $ 14,325
On $59,650 X 30% 16,702
$ 31,027
Calculation of AMT:
Taxable income $130,000
Adjustments 62,000
Tax preferences 48,000
AMTI $240,000
Exemption [$40,250 – 25%($240,000 – $112,500)] (8,375)
AMT base $231,625
Rate:
26% X $175,000 $45,500
28% X $ 56,625 15,855
Tentative AMT $ 61,355
Regular income tax liability (31,027)
AMT $ 30,328
b. Arthur’s total tax liability is $61,355, the summation of the regular tax liability of $31,027 and the AMT of $30,328.
c. Willis, Hoffman, Maloney, and Raabe, CPAs
5191 Natorp Boulevard
Mason, OH 45040
February 6, 2005
Mr. Arthur East
100 Colonel’s Way
Conway, SC 29526
Dear Mr. East:
As you requested, we have calculated your Federal tax liability for 2004. The total amount is $61,355. This consists of the regular income tax liability of $31,027 and the alternative minimum tax (AMT) liability of $30,328. The calculation of the regular income tax liability appears on Form 1040.
Since this is the first year that you have been subject to the AMT, I thought that I should comment on this additional tax. The calculation of the AMT appears on Form 6251. The AMT is a parallel income tax system. Its purpose is to provide assurance that no taxpayer with substantial economic income can avoid significant tax liability by using exclusions, deductions, and credits. As indicated on Form 6251, some of the exclusions and deductions on your Form 1040 are disallowed on your Form 6251. Such items are treated as positive adjustments and preferences on Form 6251.
I would like to work with you to minimize your AMT in the future. Since this is our first year to do tax compliance work for you, we think we can use tax planning techniques to reduce your Federal tax liability. Please call me so we can schedule a meeting at a time convenient to you.
Sincerely,
Steve Ash, CPA
Partner
pp. 15-6 to 15-9 and Figure 15-2
33. Case 1
Married
filing jointly Single
Tentative AMT $194,000 $194,000
– Regular tax liability (158,393)** (164,658)*
= AMT $ 35,607 $ 29,342
* $92,593 + $72,065 = $164,658.
** $86,328 + $72,065 = $158,393.
Case 2
Married
filing jointly Single
Tentative AMT $175,000 $175,000
– Regular tax liability (158,393)** (164,658)*
= AMT $ 16,607 $ 10,342
Figure 15-2
34. Single taxpayer:
Case 1 $40,250 – 25%($150,000 – $112,500) = $30,875
Case 2 $40,250 – 25%($250,000 – $112,500) = $ 5,875
Case 3 $40,250 – 25%($450,000 – $112,500) = $ -0-
Married filing jointly:
Case 1 $58,000 – $0(no exemption phase out) = $58,000
Case 2 $58,000 – 25%($250,000 – $150,000) = $33,000
Case 3 $58,000 – 25%($450,000 – $150,000) = $ -0-
Married filing separately:
Case 1 $29,000 – 25%($150,000 – $75,000) = $10,250
Case 2 $29,000 – 25%($250,000 – $75,000) = $ -0-
Case 3 $29,000 – 25%($450,000 – $75,000) = $ -0-
p. 15-8
35. a. Leona’s AMT is $0.
Tentative AMT $ 78,000
Regular income tax liability (135,000)
Excess of tentative AMT over regular tax liability ($ 57,000)
Since the result is negative, Leona has no AMT.
b. The nonrefundable credits cannot reduce the regular income tax liability below the amount of the tentative AMT. Therefore, Leona can use only $57,000 of the $65,000 nonrefundable credits to reduce her regular income tax liability to $78,000 ($135,000 – $57,000). The remaining $8,000 ($65,000 – $57,000) of nonrefundable credits will be lost unless they are the type of credits which qualify for carryback and/or carryforward.
pp. 15-8, 15-9, and Figure 15-2
36. Angela has two options available for the $123,000 of circulation expenditures. First, she could deduct the entire $123,000 in 2004. If she does this, she will have a positive AMT adjustment of $82,000 ($123,000 – $41,000) in 2004 and negative AMT adjustments of $41,000 ($0 – $41,000) in 2005 and 2006.
Under the second option, Angela could elect to capitalize the circulation expenses and deduct them over a 3-year period (i.e., $41,000 per year). If this election is made, there is no AMT adjustment, since the deduction will be the same for regular income tax purposes and AMT purposes.
The 28% bracket for single taxpayers begins at $70,350 and ends at $146,750 in 2004. The first $7,150 is taxed at 10%, the next $21,900 is taxed at 15%, and the next $41,300 is taxed at 25%.
If Angela deducts the entire $123,000 in 2004, she will have zero taxable income. As a result, she will have used $7,150 of the $123,000 deduction to offset income that would be taxed at 10%, $21,900 of the $123,000 deduction to offset income that would be taxed at a 15% rate, $41,300 to offset income that would be taxed at the 25% rate, and $52,650 to offset income that would be taxed at 28%. Her maximum potential savings from this strategy will be $14,325 (the tax on $70,350) plus 28% on the remainder of $52,650 ($123,000 – $70,350). Thus, the tax effect of the $123,000 deduction would be $29,067 [$14,325 + .28($52,650)].
The 28% bracket spans more than $41,000 in 2004 ($146,750 – $70,350 = $76,400), and the 28% bracket is likely to span a similar range in 2005 and 2006. If Angela writes off the circulation expenditures over three years at the rate of $41,000 per year, the entire $123,000 deduction will offset income that would be taxed at near 28% (i.e., 28% in 2004 and 28% in 2005 and 2006). Therefore, Angela should be advised that she can achieve substantial tax savings by amortizing the circulation expenditures over a three-year period. Her tax savings from a $123,000 deduction spread over 3 years at 28% in 2004 and 28% in 2005 and 2006 would be $34,440 [($41,000 X 28%) + ($41,000 X 28%) + ($41,000 X 28%)].
In summary, Angela could save $29,067 in income tax if she expenses the circulation expenditures in the year incurred, but could save $34,440 if she amortizes them over 3 years.
Note: The time value of money should be considered in computing the final tax savings achieved by the three-year amortization strategy.
p. 15-10
37. Computation of adjustment for circulation expenditures:
2004 regular income tax deduction $135,000
2004 AMT deduction ($135,000/3) (45,000)
Positive AMT adjustment in 2004 $ 90,000
2005 regular income tax deduction $ 60,000
2005 AMT deduction: [($135,000/3) + ($60,000/3)] (65,000)
Negative AMT adjustment in 2005 ($ 5,000)
p. 15-10
38. a. Lonzo must recognize a positive AMT adjustment if the regular MACRS deduction (Table 8-8) exceeds the AMT deduction (Table 8-9)
Forsythia Acres
For 1998
MACRS deduction for regular income
tax purposes ($210,000 X 3.182%) $6,682
Depreciation deduction for AMT purposes
($210,000 X 2.188%) (4,595)
Positive AMT adjustment $2,087
b. Forsythia Acres
For 2004
MACRS deduction for regular income
tax purposes ($210,000 X 3.636%) $7,636
Depreciation deduction for AMT purposes
($210,000 X 2.500%) (5,250)
Positive AMT adjustment $2,386
Square One
For 2004
MACRS deduction for regular income
tax purposes ($625,000 X 2.879%) $17,994
Depreciation deduction for AMT purposes
($625,000 X 2.879%) (17,994)
AMT adjustment $ -0-
The AMT depreciation adjustment for real property applies only to real property placed in service before January 1, 1999. Real property placed in service after December 31, 1998 uses the same MACRS recovery periods (Table 8-8) for calculating the AMT as for calculating the regular income tax. pp. 15-10 and 15-11
39. a. In order to produce the largest depreciation deduction for regular income tax purposes, Helen will use Table 8-1 (200% DB method). For AMT purposes, she must use Table 8-4 (150% DB method).
Regular income tax depreciation ($300,000 X 20%) $60,000
AMT depreciation ($300,000 X 15%) (45,000)
Positive adjustment $15,000
Note that Helen cannot deduct additional first-year depreciation because the equipment is used rather than new.
b. Helen could elect to depreciate the equipment using Table 8-4 (150% DB method) for regular income tax purposes rather than under the regular MACRS method (200% DB method). The election reduces the depreciation percentage factor from 20% to 15%. Therefore, the depreciation deduction for both AMT purposes and regular income tax purposes would be $45,000.
Making the election reduces the AMT adjustment to $0. Such an election may be beneficial if Helen is going to be subject to the AMT. The election would not be beneficial if Helen’s regular tax liability is going to exceed her tentative AMT anyway.
c. Willis, Hoffman, Maloney, and Raabe, CPAs
5191 Natorp Boulevard
Mason, OH 45040
August 9, 2004
Ms. Helen Carlon
500 Monticello Avenue
Glendale, AZ 85306
Dear Ms. Carlon:
In response to your inquiry regarding the appropriate depreciation method for the $300,000 of used equipment placed in service during March 2004, two options are available. The first will produce a larger depreciation deduction, but may result in the AMT being paid. The second option will produce a smaller depreciation deduction, but will have no effect on the AMT. Note that as we discussed, you decided not to elect § 179 limited expensing treatment.
Under the first option, depreciation is calculated using the 200% declining balance method with a 5-year recovery period. The amount of the depreciation deduction under this method is $60,000 ($300,000 X 20%). However, for AMT purposes, the depreciation is calculated using the 150% declining balance method with a 5-year recovery period. The amount of the depreciation deduction for AMT purposes is $45,000 ($300,000 X 15%). Therefore, for AMT purposes, there will be a positive adjustment of $15,000 ($60,000 – $45,000).
Under the second option, depreciation for regular income tax purposes and AMT purposes is calculated using the depreciation method and recovery period required for AMT purposes. Thus, in both cases, the amount of the depreciation deduction is $45,000. The benefit of electing to calculate the regular income tax depreciation this way is that the aforementioned positive adjustment for AMT purposes is avoided.
Whether the election that produces a smaller depreciation deduction for regular income tax purposes but avoids a positive AMT adjustment is beneficial depends on your AMT status absent the effect of the depreciation deduction. In order to advise you regarding this election, I need to meet with you to obtain additional tax information. Please provide me with a date and time that is convenient to you.
Sincerely,
James Singer, CPA
Partner
pp. 15-10 and 15-12
40. a. Mining exploration and development costs can be expensed in the year incurred for regular income tax purposes. These expenditures must be amortized over a 10-year period for AMT purposes. Gary’s regular income tax deduction would be $600,000 in 2004 and his AMT deduction would be $60,000 ($600,000/10). Therefore, Gary would have a positive adjustment of $540,000 in 2004 ($600,000 regular income tax deduction – $60,000 AMT deduction). His negative adjustment for each of the next nine years will be $60,000 ($0 regular income tax deduction – $60,000 AMT deduction).
b. Gary can avoid having an adjustment by electing to amortize the mining exploration and development costs over a ten-year period for regular income tax purposes.
c. Gary should consider the present value of the cash flows, different tax brackets between regular income tax and AMT, and the possible effect this adjustment will have on future AMT calculations.
Example 9 and related discussion
41. For 2004, there is a positive AMT adjustment of $120,000.
AMT:
Revenues ($500,000 X 60%) $300,000
Expenses (180,000) $120,000
Regular income tax:
Revenues $ -0-
Expenses (-0-) (-0-)
AMT adjustment $120,000
For 2005, there is a negative AMT adjustment of $120,000.
AMT:
Revenues ($500,000 – $300,000) $200,000
Expenses ($295,000 – $180,000) (115,000) $ 85,000
Regular income tax:
Revenues $500,000
Expenses (295,000) (205,000)
AMT adjustment ($120,000)
p. 15-13
42. a. For regular income tax purposes and for AMT purposes, there are no tax results which need to be reported in 2004, the year of grant.
b. For regular income tax purposes and for AMT purposes, there are no tax results which need to be reported in 2008, the year of exercise.
c. For regular income tax purposes, the spread of $30,000 ($100,000 fair market value – $70,000 option price) is not recognized in 2009, the year when rights in the stock become freely transferable and are not subject to a substantial risk of forfeiture. For AMT purposes, however, the spread of $30,000 is a positive AMT adjustment in 2009.
d. The regular income tax basis of $70,000 is different from the AMT basis of $100,000 ($70,000 + $30,000). Thus, there is a negative AMT adjustment in 2012, the year of sale, of $30,000 ($80,000 – $50,000).
Regular Income Tax AMT
Amount realized $150,000 $150,000
Amount basis (70,000) (100,000)
Recognized gain $ 80,000 $ 50,000
pp. 15-13 and 15-14
43. In 2004, when the rights become freely transferable and are not subject to a substantial risk of forfeiture, Diego has a positive $27,000 adjustment for AMT purposes [($92 – $65) X 1,000 shares]. The transaction has no effect on regular taxable income or alternative minimum taxable income in 1999. There is no effect on regular taxable income in 2004 when the rights in the stock become freely transferable and are not subject to a substantial risk of forfeiture.
When the stock is sold in 2005, the recognized gain for regular income tax purposes and AMT purposes is calculated as follows:
Regular Income Tax AMT
Amount realized $100,000 $100,000
Amount basis (65,000) (92,000)
Recognized gain $ 35,000 $ 8,000
The AMT basis is the fair market value on the exercise date (i.e., $92 per share). Since the gain on the sale for regular income tax purposes exceeds the recognized gain for AMT purposes, there is a $27,000 negative adjustment in calculating AMT. pp. 15-13 and 15-14
44. a. Amount realized $580,000
Less: Adjusted basis (312,000)
Realized and recognized gain $268,000
b. Amount realized $580,000
Less: Adjusted basis (345,000)
Realized and recognized gain $235,000
c. Gain for regular income tax purposes $268,000
Less: Gain for AMT purposes (235,000)
Negative AMT adjustment $ 33,000
pp. 15-14 to 15-16
45. The 2004 loss will not be deductible either for regular income tax or AMT purposes, since no passive income is present. The suspended passive loss for regular income tax purposes is $11,750 ($160,000 gross income – $122,000 operating expenses – $49,750 regular income tax depreciation). The suspended passive loss for AMT purposes is $3,000 ($160,000 gross income – $122,000 operating expenses – $41,000 ADS depreciation). Examples 15 and 16 and related discussion
46. a. All of the medical expenses are eligible for the medical expense deduction. Therefore, for regular income tax purposes, Wally’s and Gloria’s medical expense deduction is $14,500 [$29,500 – 7.5%($200,000)].
b. For AMT purposes, only the medical expenses in excess of 10% of AGI can be deducted. Therefore, the medical expense deduction is $9,500 [$29,500 – 10% ($200,000)].
c. The AMT adjustment for medical expenses is a positive adjustment of $5,000 ($14,500 – $9,500).
p. 15-18
47. a. Wolfgang’s itemized deductions for AMT purposes are calculated as follows:
Medical expenses [$5,500 – (10% X $60,000)] $ -0-
Charitable contributions 7,000
Qualified housing interest 6,000
Casualty loss 1,500
Total $14,500
Neither the state income taxes of $4,200 nor the miscellaneous itemized deductions of $3,300 are deductible for AMT purposes. An additional 2.5% of AGI ($1,500) is disallowed in calculating medical expenses. Thus, none of the medical expenses are deductible.
b. The AMT adjustment is calculated as follows:
Itemized deductions for regular income tax $23,000
Less: Itemized deductions for AMT purposes (14,500)
Positive AMT adjustment $ 8,500
pp. 15-17 to 15-19
48. For regular income tax purposes, the following amounts are deductible as qualified residence interest:
Interest on personal residence $12,000
Interest on cabin 4,800
Interest on home equity loan 5,000
Total qualified residence interest deduction $21,800
For AMT purposes, however, the deduction is limited to qualified housing interest, which includes the following:
Interest on personal residence $12,000
Interest on cabin 4,800
Total qualified housing interest deduction $16,800
Interest on the home equity loan is not deductible for AMT purposes because the proceeds were not used to substantially improve a qualified residence. Therefore, an AMT adjustment is required:
Total qualified residence interest deduction $21,800
Total qualified housing interest deduction (16,800)
Positive AMT adjustment $ 5,000
p. 15-19
49. For regular income tax and AMT purposes, investment interest expense is limited to net investment income. Therefore, Yoon’s regular income tax deduction for investment interest expense is limited to $10,000 (the amount of dividends received). For regular income tax purposes, the private activity bond interest of $5,000 is excludible from gross income and the related $3,500 interest expense is not deductible. The $5,000 interest income on the private activity bonds is offset by the $3,500 interest expense, so Yoon reports a $1,500 tax preference for AMT purposes. In addition, the net investment income of $1,500 ($5,000 – $3,500) from the private activity bonds is treated as part of net investment income for AMT purposes. Net investment income is $11,500 ($10,000 + $1,500). Therefore, for AMT purposes, $11,500 of the $13,000 investment interest expense can be deducted. pp. 15-19 and 15-20
50. a. Walter and Edith’s itemized deductions are calculated as follows:
Regular
Income Tax AMT Adjustment
Medical expenses (see Note 1) $ 1,250 $ -0- $ 1,250
State income taxes 2,800 -0- 2,800
Personal property tax 900 -0- 900
Real estate tax 9,100 -0- 9,100
Interest on residence 8,600 8,600 -0-
Interest (home equity) 1,800 -0- 1,800
Investment interest 2,600 2,600 -0-
Charitable contribution 4,200 4,200 -0-
Employee expenses (Note 2) 1,600 -0- 1,600
Totals $32,850 $15,400 $17,450
NOTES
(1) Medical expenses:
For regular income tax [$9,500 – (7.5% X $110,000)] $1,250
For AMT [$9,500 – (10% X $110,000)] -0-
Positive adjustment $1,250
(2) Unreimbursed employee expenses:
Expenses $3,800
2% of AGI ($110,000) (2,200)
Deduction for regular income tax $1,600
b. Walter and Edith would have a positive adjustment of $17,450, as computed above. In addition, they would have a tax preference of $1,100 ($5,000 interest on private activity bonds – $3,900 related interest expense).
pp. 15-17 to 15-20
51. There are positive AMT adjustments of $4,850 for the standard deduction and $3,100 for the personal exemption. Alternative minimum taxable income is $223,950 ($98,000 taxable income + $118,000 preferences + $4,850 standard deduction + $3,100 exemption). Examples 24 and 25 and related discussion
52. Emily’s percentage depletion deduction for regular income tax purposes is $21,000 ($140,000 income X 15% depletion rate). This results in a tax preference of $9,000 ($21,000 percentage depletion – $12,000 basis at beginning of year). Example 26
53. Amos’s preference item for IDC is computed as shown below:
IDC expensed in the year $70,000
Less: IDC if amortized over 10 years (7,000)
Excess IDC $63,000
Less: 65% of $60,000 net income from oil and gas (39,000)
IDC preference $24,000
pp. 15-21 and 15-22
54. $9,000 interest on private activity bonds + $35,000 bargain element on incentive stock options + $4,850 standard deduction + $3,100 personal exemption = $51,950. pp. 15-13, 15-14, and 15-20 to 15-22
55. Pat’s tentative AMT for 2004 is computed as shown below:
Taxable income computation
Salary $ 90,000
Interest income 1,000
Dividend income 5,000
Gambling income 4,000
Adjusted gross income $100,000
Itemized deductions:
Medical expenses ($12,000 – $7,500) $4,500
State income taxes 4,100
Real estate taxes 2,800
Mortgage interest on residence 3,100
Investment interest expense 1,800
Gambling losses (limited to gambling income) 4,000
Total itemized deductions (20,300)
Personal exemption (3,100)
Taxable income $ 76,600
Tentative minimum tax computation
Taxable income $ 76,600
Plus adjustments:
Medical expenses 2,500
Regular income tax [$12,000 – (7.5% X $100,000) = $4,500]
AMT [$12,000 – (10% X $100,000) = $2,000]
State income taxes 4,100
Real estate taxes 2,800
Personal exemption 3,100
Subtotal $ 89,100
Plus: Preference (interest on private activity bonds) 40,000
Alternative minimum taxable income (AMTI) $129,100
Exemption [$40,250 – 25%($129,100 – $112,500)] (36,100)
AMT base $ 93,000
AMT rate X .26
Tentative AMT $ 24,180
pp. 15-17 to 15-21
56. Based on the amount of Ronald’s standard deduction and number of personal and dependency exemptions, Ronald’s filing status is head of household. Therefore, Ronald’s regular income tax liability is $20,600 [$5,325 + 25%($100,000 – $38,900)]. Ronald’s AMT is calculated as follows:
Taxable income $100,000
Adjustments ($7,150 + $6,200) 13,350
Preferences 60,000
AMTI $173,350
Exemption [$40,250 – 25%($173,350 – $112,500)] (25,038)
AMT base $148,312
Rate X 26%
Tentative AMT $ 38,561
Regular income tax liability (20,600)
AMT $ 17,961
pp. 15-3 to 15-9, 15-21, and Figure 15-2
57. a. Computation of Tara’s items of AMT adjustments and preferences for 2004:
Incentive stock option adjustment $ 45,000
Excess depreciation on building adjustment ($49,000 – $26,000) 23,000
Percentage depletion in excess of property’s adjusted basis preference 50,000
Standard deduction adjustment 4,850
Personal exemption adjustment 3,100
Total adjustments and preferences $125,950
pp. 15-11, 15-13, 15-20, and 15-21
b. Calculation of alternative minimum tax:
Taxable income $121,000
Adjustments and preferences 125,950
Alternative minimum taxable income (AMTI) $246,950
Less: Exemption amount (Note 1) (6,637)
Alternative minimum tax base $240,313
Tentative minimum tax (Note 2) $ 63,788
Less: Regular income tax on $121,000 (28,507)
Alternative minimum tax $ 35,281
Regular income tax calculation
Tax on $121,000:
On $70,350 $ 14,325
On ($121,000 – $70,350) at 28% 14,182
Total tax $ 28,507
Notes
(1) Exemption phase-out: ($246,950 – $112,500) X .25 = $33,613; then $40,250 – $33,613 = $6,637 exemption amount. pp. 15-8 and 15-9
(2) AMT tax calculations:
$175,000 X 26% $45,500
($240,313 – $175,000) X 28% 18,288
Tentative minimum tax $63,788
Concept Summary 15-1 and Examples 24 and 25
58. Gross income:
Salary $141,000
Interest from bank 12,000
Interest on corporate bonds 7,000
Short-term capital gain 8,000 $168,000
Less: Deductions for AGI (-0-)
Adjusted gross income $168,000
Less: Deductions from AGI
Itemized deductions (Note 1) $ 31,781
Personal exemptions (Note 5) 2,418 (34,199)
Taxable income $133,801
Regular income tax calculation
Tax on $133,801:
On $70,350 $ 14,325
On $133,801 – $70,350 at 28% 17,766
Total tax $ 32,091
Computation of alternative minimum tax:
Taxable income $133,801
Plus adjustments and preferences:
Itemized deductions (Note 6) 17,381
Personal exemption 2,418
Preferences 116,000
Cutback adjustment (759)
Alternative minimum taxable income $268,841
Less: Exemption [partial phaseout (Note 7): AMTI does not
exceed $273,500] (1,165)
AMT base $267,676
Tentative AMT (Note 8) $ 71,449
Less: Regular income tax (32,091)
Alternative minimum tax $ 39,358
Notes
1) Because Larry’s AGI exceeds $142,700, Category A itemized deductions are those subject to the cutback adjustment (i.e., subject to the 3% of AGI floor). p. 10-30
|Category A | |Category B |
|Unreimbursed employee | |Not subject to cutback adjustment: Medical expenses |
|business expenses (Note 2) $ 640 | |$11,400 |
|State income taxes |6,500 | |Casualty loss (Note 4) | -0- |
|Real property taxes |6,800 | | | |
|Mortgage interest | 7,200 | | | |
|Totals |$21,140 | | |$11,400 |
(a) Determine 80% limitation: (80% X $21,140 Category A deductions = $16,912 maximum reduction).
(b) Determine 3% of the excess amount over the threshold: [3% X ($168,000 – $142,700) = $759].
(c) Subtract from the Category A itemized deductions the lesser of the amounts determined in Step a. or b.: ($21,140 – $759 = $20,381).
(d) Add the amount determined in Step c. to the Category B itemized deductions: ($20,381 + $11,400 = $31,781 total itemized deductions).
(2) Unreimbursed employee expenses $4,000
Less: 2% of $168,000 (3,360)
Deductible amount $ 640
(3) Total medical expenses $24,000
Less: 7.5% of $168,000 (12,600)
Deductible amount $11,400
(4) Casualty loss ($20,000 decline – $12,000 insurance – $100 floor) $ 7,900
Less: 10% of $168,000 AGI (16,800)
Deductible amount $ -0-
5) Personal exemption phaseout:
Personal exemption amount $3,100
AGI less threshold amount ($168,000 – $142,700) = $25,300
$25,300/$2,500 (rounded up) = 11 X 2% = 22%
22% X $3,100 = (682)
Personal exemption amount $2,418
6) AMT itemized deductions:
Mortgage interest $ 7,200
Medical expenses [$24,000 – 10%($168,000)] 7,200
Total $14,400
Regular income tax itemized deductions (Note 1) $31,781
Less: AMT itemized deductions (14,400)
Positive adjustment $17,381
7) AMT exemption phaseout:
Exemption amount $40,250
Less: Reduction [($268,841 – $112,500) X 25%] (39,085)
Exemption $ 1,165
(8) AMT tax calculation:
$175,000 X 26% $45,500
($267,676 – $175,000) X 28% 25,949
Tentative minimum tax $71,449
pp. 15-17 to 15-21
59. AMT computation
Taxable income $ -0-
Plus: Timing adjustments 200,000
Plus: AMT exclusion items 100,000
AMTI $300,000
Minus: Exemption [$40,250 – .25($300,000 – $112,500)] (-0-)
AMT base $300,000
Tentative AMT [.26($175,000) + .28($300,000 – $175,000)] $ 80,500
Minus: Regular income tax liability (-0-)
AMT $ 80,500
AMT without timing adjustments
Taxable income $ -0-
Plus: AMT exclusion items 100,000
AMTI $100,000
Minus: Exemption [$40,250 – .25($100,000 – $112,500)] (40,250)
AMT base $ 59,750
Tentative AMT (.26 X $59,750) $ 15,535
Minus: Regular income tax liability (-0-)
AMT $ 15,535
Credit carryover computation
AMT $ 80,500
Less: AMT without timing adjustments (15,535)
AMT credit carryover $ 64,965
Examples 29 to 31
60. a. Aqua is first exempt from the AMT for 1998 (the first year for which the exemption is available) as a “small corporation.” Aqua is classified as a small corporation if (1) it had average annual gross receipts of $5 million or less for the three-year period beginning after December 31, 1993 and (2) it had average annual gross receipts for each subsequent three-year period of $7.5 million or less (i.e., 1995, 1996, and 1997 if the tax year is 1998; 1996, 1997, and 1998 if the tax year is 1999; 1997, 1998, and 1999 if the tax year is 2000; 1998, 1999, and 2000 if the tax year is 2001; 1999, 2000, and 2001 if the tax year is 2002; 2000, 2001, and 2002 if the tax year is 2003; 2001, 2002, and 2003 if the tax year is 2004). For the three-year period which includes 1994, 1995, and 1996, Aqua had average annual gross receipts of:
|$4,800,000 + $5,300,000 + $4,600,000 |= $4,900,000 |
|3 years | |
Thus, Aqua passes the $5 million test for this period. For the three-year period which includes 1995, 1996, and 1997, Aqua had average annual gross receipts of:
|$5,300,000 + $4,600,000 + $8,200,000 |= $6,033,333 |
|3 years | |
Thus, Aqua passes the $7.5 million test for this period. Aqua is a small corporation for 1998. Thus, it is exempt from the AMT for 1998.
b. Aqua remains exempt from the AMT in 2004. In order to do so, Aqua’s average annual gross receipts for the three-year period consisting of 1996, 1997, and 1998 do not exceed $7.5 million.
|$4,600,000 + $8,200,000 + $8,500,000 |= $7,100,000 |
|3 years | |
Likewise, Aqua’s average annual gross receipts for the three-year period consisting of 1997, 1998, and 1999 do not exceed $7.5 million.
|$8,200,000 + $8,500,000 + $5,200,000 |= $7,300,000 |
|3 years | |
Likewise, Aqua’s average annual gross receipts for the three-year period consisting of 1998, 1999, and 2000 do not exceed $7.5 million.
|$8,500,000 + $5,200,000 +$8,000,000 |= $7,233,333 |
|3 years | |
Likewise, Aqua’s average annual gross receipts for the three-year period consisting of 1999, 2000, and 2001 do not exceed $7.5 million.
|$5,200,000 + $8,000,000 + $6,000,000 | = $6,400,000 |
|3 years | |
Likewise, Aqua’s average annual gross receipts for the three-year period consisting of 2000, 2001, and 2002 do not exceed $7.5 million.
|$8,000,000 + $6,000,000 + $6,200,000 | = $6,733,333 |
|3 years | |
Finally, Aqua’s average annual gross receipts for the three-year period consisting of 2001, 2002, and 2003 do not exceed $7.5 million.
|$6,000,000 + $6,200,000 + $6,100,000 | = $6,100,000 |
|3 years | |
pp. 15-27
61. 2003 2004 2005
ACE $4,000 $3,000 $2,000
Less: Unadjusted AMTI (3,000) (2,000) (5,000)
Difference $1,000 $1,000 ($3,000)
Rate X .75 X .75 X .75
Adjustment $ 750 $ 750 ($1,500)*
*$2,250 ($3,000 X .75) but limited to $750 + $750, or $1,500. Further, the unusable negative adjustment of $750 ($2,250 – $1,500) is lost forever.
Concept Summary 15-2, Example 32, and related discussion
62. Quincy Corporation:
AMTI $150,000
Less: Exemption amount (40,000)
AMT base $110,000
Rate X .20
Tentative AMT $ 22,000
Note: In this case, there is no reduction in the exemption amount because AMTI
does not exceed $150,000.
Redland Corporation:
Step 1
AMTI $160,000
Less: Threshold amount for exemption (150,000)
Amount by which AMTI exceeds $150,000 $ 10,000
Reduction rate X .25
Applicable reduction in exemption amount $ 2,500
Step 2
Exemption amount $ 40,000
Less: Reduction in exemption amount from Step 1 (2,500)
Applicable exemption amount $ 37,500
Step 3
AMTI $160,000
Less: Applicable exemption amount from Step 2 (37,500)
AMT base $122,500
Rate X .20
Tentative AMT $ 24,500
Tanzen Corporation:
Step 1
AMTI $320,000
Less: Threshold amount for exemption (150,000)
Amount by which AMTI exceeds $150,000 $170,000
Reduction rate X .25
Applicable reduction in exemption amount $ 42,500
Step 2
Exemption amount $ 40,000
Less: Reduction in exemption amount from Step 1 (42,500)
Applicable exemption amount $ -0-
Step 3
AMTI $320,000
Less: Applicable exemption amount from Step 2 (-0-)
AMT base $320,000
Rate X .20
Tentative AMT $ 64,000
Note: In this case, the exemption amount is phased out entirely because AMTI
exceeds $310,000.
pp. 15-28 to 15-30
63. a. Tax on taxable income of $2,600,000:
$2,600,000 X 34% = $884,000
b. Taxable income $2,600,000
Adjustments and tax preferences:
Depreciation for regular income tax on realty in
excess of ADS straight-line $550,000
Excess amortization of certified pollution control
facilities 450,000
Tax-exempt interest on private activity bonds 1,030,000
Percentage depletion in excess of the property’s
adjusted basis 60,000 2,090,000
AMTI $4,690,000
Less: Exemption (AMTI exceeds $310,000) (-0-)
Alternative minimum tax base $4,690,000
AMT tax rate X .20
Tentative AMT (no foreign tax credit) $ 938,000
c. Tentative AMT $ 938,000
Less: Regular income tax liability (884,000)
AMT $ 54,000
pp. 15-28 to 15-31
CUMULATIVE PROBLEMS
64. Regular income tax computation:
Free housing (Note 1) $ -0-
Grocery allowance (Note 2) 10,400
Short-term capital gain 44,000
Interest income (Note 3) 12,000
Lottery winnings 9,000
Incentive stock option exercise (Note 4) -0-
Life insurance proceeds (Note 5) -0-
AGI before rental loss and alimony $75,400
Real estate rental loss (Note 6) (25,000)
Alimony (18,000)
Traditional IRA contribution (Note 7) (3,000)
Adjusted gross income $29,400
Itemized deductions:
Charitable contribution (Note 8) $2,600
Consumer interest (Note 9) -0-
State and local income taxes 3,600
Medical expenses [$4,500 – (7.5% X $29,400 AGI)](Note 10) 2,295
Gambling losses (Note 11) 8,000
Miscellaneous itemized deductions (Note 12) -0- (16,495)
Personal exemption (Note 13) (3,100)
Taxable income $ 9,805
Income tax on $9,805 (Note 14) $ 1,113
AMT computation:
Taxable income $ 9,805
Adjustments and preferences:
Incentive stock option adjustment $48,000
State and local income taxes 3,600
Medical expenses (Note 15) 735
Personal exemption 3,100
Interest on private activity bonds 49,000
Total adjustments and preferences 104,435
Alternative minimum taxable income $114,240
Less: AMT exemption [$40,250 – 25%($114,240 – $112,500)] (39,815)
AMT base $ 74,425
AMT rate X .26
Tentative AMT $ 19,351
Less: Regular income tax (1,113)
AMT $ 18,238
2004 Tax Liability
Regular income tax liability $ 1,113
Alternative minimum tax 18,238
Total tax liability $ 19,351
Note 1
Because Ron is a minister of the gospel, he can exclude the fair rental value of the parsonage of $2,000 per month.
Note 2
The grocery allowance of $200 per week does not qualify for the § 119 meal exclusion.
Note 3
The $49,000 of interest on private activity bonds is excludible from gross income.
Note 4
The spread on the ISO of $48,000 ($68,000 – $20,000) is not recognized in 2004.
Note 5
The life insurance proceeds of $750,000 are excludible from Ron’s gross income.
Note 6
Loss on rental property: Because Ron is an active participant, he may deduct part of the $55,000 loss ($190,000 – $245,000) under the rental real estate exception. Because his AGI is less than $100,000, the loss allowed under the rental real estate exception is $25,000. The balance of the loss of $30,000 is suspended. p. 11-23
Note 7
The $3,000 contribution to the traditional IRA is a deduction for AGI.
Note 8
Because the holding period of the stock is long-term and the stock is an intangible asset, the full fair market value of $1,600 qualifies for the charitable contribution deduction. The $1,000 he gave to the church from the lottery also qualifies.
Note 9
The $3,500 of consumer interest cannot be deducted.
Note 10
The $8,500 of medical expenses paid by Ron for the hospital expenses of Kate’s deceased husband are not deductible by Ron because he was not Ron’s dependent.
Note 11
Gambling losses can be deducted only to the extent of gambling income. Thus, all of the $8,000 of gambling losses from the lottery can be deducted since the gambling winnings are $9,000.
Note 12
Miscellaneous itemized deductions are deductible only to the extent they exceed 2% of AGI ($29,400 X 2% = $588). The $200 for the safe deposit box rental is classified as a miscellaneous itemized deduction. Since the $200 is less than the $588, none of it can be deducted.
Note 13
Ron receives a personal exemption for himself. He is not eligible for a dependency deduction for Kate’s baby.
Note 14
Tax on $7,150 $ 715
15% X ($9,805 – $7,150) 398
$1,113
Note 15
Regular income tax medical deduction $2,295
AMT medical deduction (1,560)*
Medical deduction positive adjustment $ 735
* $4,500 – (10% X $29,400) = $1,560 medical deduction.
65. Robert and Jane have taxable income for 2003 as follows:
Salary for Robert (Indiana Foundry, Inc.) $ 89,000
Salary for Jane (Carmel Computer Associates) 102,000
Interest income (Carmel National Bank) (Note 1) 3,300
Dividend income (Able Computer Corporation) 3,500
Gambling income (Note 2) 4,000
Award income (Note 3) 15,000
Capital gain (Note 4) 13,000
Adjusted gross income $229,800
Deductions from AGI
Itemized deductions:
Medical expenses [$19,725 – 7.5% X $229,800 AGI)] $ 2,490
State income tax ($3,970 + $4,710) 8,680
Real property tax on personal residence 4,600
Mortgage interest on personal residence 7,500
Investment interest expense 1,900
Contributions ($11,000 + $2,000) 13,000
Gambling losses (Note 2) 4,000
Subtotal $42,170
Minus: reduction under 3% cutback adjustment (Note 5) (2,709)
Total itemized deductions (39,461)
Exemptions (Note 6) (10,004)
Taxable income $180,335
Alternative minimum tax for Robert and Jane is computed as shown below.
Taxable income plus exemptions ($180,335 + $10,004) $190,339
Reduction caused by 3% cutback adjustment for itemized deductions (2,709)
(Note 5)
Subtotal $187,630
Adjustments:
Medical expenses [$2,490 for regular income tax – $0
for AMT (Note 7)] $ 2,490
Taxes ($8,680 state income tax + $4,600 real
property tax) 13,280
Total adjustment for itemized deductions 15,770
Preference:
Interest on private activity bonds 30,200
Alternative minimum taxable income (AMTI) $233,600
Less: Exemption (Note 8) (37,100)
Alternative minimum tax base $196,500
Less: Amount eligible for alternative tax on net capital gain (Note 9) (16,500)
AMT base subject to ordinary tax rates $180,000
Tentative AMT liability on $180,000 (Note 13) $ 46,900
Tentative AMT liability on $16,500 (Note 14) 2,475
Tentative AMT $ 49,375
Less: Regular income tax liability (Note 10) (38,529)
AMT $ 10,846
Note 1 – excludible interest income
The Carmel Sanitation District Bonds interest income of $30,200 is excluded from gross income.
Note 2– gambling income and losses
Since their gambling losses of $5,750 exceed the gambling income of $4,000, the excess loss of $1,750 is disallowed. The $4,000 of gambling income is included in gross income and the allowed $4,000 of gambling losses are classified as an itemized deduction.
Note 3 – award received
The $15,000 that Jane received for the “Citizen of the Year” is included in her gross income.
Note 4 – sale of land
Robert’s adjusted basis for the land he purchased is $67,000. So his recognized gain on the sale of the land is $13,000 ($80,000 amount realized – $67,000 adjusted basis). Robert’s holding period is long term. The gain is classified as long-term capital gain and is eligible for the alternative tax rate.
Note 5 - reduction for 3% cutback adjustment for itemized deductions
This computation determines the reduction in itemized deductions from application of the 3% cutback adjustment. The computation follows the format provided by the IRS in the instructions for Schedule A.
Medical expenses [$19,725 – (7.5% X $229,800 AGI)] $ 2,490
State income tax 8,680
Real property tax on personal residence 4,600
Mortgage interest on personal residence 7,500
Investment interest expense 1,900
Contributions 13,000
Gambling losses 4,000
Total itemized deductions $42,170
Medical expenses [$19,725 – (7.5% X $229,800 AGI)] $2,490
Investment interest expense 1,900
Gambling losses 4,000
Total of itemized deductions not subject to reduction (8,390)
Itemized deductions subject to reduction $33,780
80% of $33,780 = maximum cutback adjustment $27,024
AGI $229,800
Less: Threshold for married, joint return (139,500)
Excess AGI $ 90,300
3% of $90,300 excess AGI $ 2,709
Reduction (smaller of $27,024 or $2,709) $ 2,709
Note 6 – dependency deductions and phaseout
Robert and Jane qualify for four personal and dependency exemptions. The two dependency deductions are for the twins, Ellen and Sean. They do not qualify for a dependency deduction for Robert’s daughter, Amy, even though Robert provides over 50% of her support. Margaret, Robert’s former wife, is the custodial parent, and she does not furnish Robert with a signed Form 8332.
$3,050 X 4 = $12,200
However, because Robert and Jane’s AGI exceeds the threshold amount, the personal and dependency exemptions are subject to the phaseout provision.
AGI $229,800
Less: Threshold amount (209,250)
Excess $ 20,550
Divided by $2,500 = 8.22%
Round to 9%
X 2% = Phaseout percentage 18%
Amount of phaseout ($12,200 X 18%) $ 2,196
Personal and dependency exemptions $12,200
Less: Phaseout (2,196)
Deductible personal and dependency exemptions $10,004
Note 7 - AMT medical deduction
$229,800 X 10% = $22,980
$19,725 – $22,980 = $0 medical deduction for AMT.
Note 8 - alternative minimum tax exemption
The AMT exemption phase-out for a married couple filing jointly applies if alternative minimum taxable income (AMTI) exceeds $150,000. The Armstrong’s have AMTI of $233,600, so the $58,000 exemption is reduced as follows:
AMTI $233,600
Less: Threshold (150,000)
Excess $ 83,600
X 25% X 25%
Amount of phaseout $ 20,900
Exemption amount $ 58,000
Less: Amount of phaseout (20,900)
Deductible exemption amount $ 37,100
Note 9
Amounts eligible for the beneficial 15% rate include the following:
Net capital gain from stock sale $13,000
Dividend income 3,500
$16,500
Note 10 - regular income tax liability
Taxable income $180,335
Tax on $174,700 $ 39,096
33% X ($180,335 – $174,700) 1,860
$ 40,956
However, since the $13,000 long-term capital gain on the sale of the land and the dividend income are eligible for the beneficial rates for the alternative tax on net capital gain, Robert and Jane’s regular income tax liability is $38,529 rather than the $40,956 calculated above.
Tax on $163,835 ($180,335 – $16,500):
Tax on $114,650 $22,282
28% X ($163,835 – $114,650) 13,772
$36,054
Plus: Tax on $16,500 at beneficial rate:
$16,500 X 15% 2,475
$38,529
Note 11 – holding period for the land
Robert’s holding period begins on March 15, 1998.
Note 12 – Jane’s inheritance
The $600,000 that Jane inherited from her grandfather is excluded from Jane’s gross income.
Note 13 – tentative AMT liability on AMT base subject to ordinary tax rates
$175,000 X 26% = $45,500
5,000 X 28% = 1,400
$180,000 $46,900
Note 14 – tentative AMT liability on AMT base eligible for alternative tax on net capital gain
The $16,500 amount that qualifies for the alternative tax treatment for regular income tax purposes also qualifies for alternative tax treatment for AMT purposes.
$16,500 X 15% = $2,475
Note 15 – child tax credit
The twins, Ellen and Sean, satisfy the statutory requirements for the child tax credit. However, Robert and Jane’s AGI of $229,800 results in a full phaseout of the credit (i.e., the phaseout commences at an AGI of $110,000).
See the tax return solution beginning on p. 15-35 of the Solutions Manual.
Willis, Hoffman, Maloney, and Raabe, CPAs
5191 Natorp Boulevard
Mason, OH 45040
April 2, 2004
Mr. and Mrs. Robert Armstrong
1802 College Avenue
Carmel, IN 46302
Dear Bob and Jane:
Your 2003 income tax return is enclosed and indicates that you have a refund of $5,625 ($49,375 tax liability – $55,000 withholdings).
Because the Carmel Sanitation District bonds are private activity bonds subject to the alternative minimum tax, $10,846 of the total tax owed is due to the alternative minimum tax. In order to avoid this tax in the future, you might consider changing the investment to tax-free bonds which are not private activity bonds and, therefore, not subject to the alternative minimum tax. If you have any questions, please call me.
Sincerely,
John Jones, CPA
Partner
The answers to the Research Problems are incorporated into the 2005 Comprehensive Volume of the Instructor’s Guide with Lecture Notes to Accompany WEST FEDERAL TAXATION: COMPREHENSIVE VOLUME.
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