ACE and AMT Credits

1
ACE and AMT Credits

• Alternative Minimum Tax
• Capital University Law School
• Fall 2005
• William A Raabe, PhD, CPA

2
ACE Adjustment

• ACE instead of BURP, but not Current EP
• Separate computation within AMTI
• Adjustment 75 (ACE Pre ACE AMTI)
• ACE can be negative
• But reduction limited to previous years (net)
  positive ACE adjustments
• Effective tax rate on ACE increases 15
• Permanent v Timing differences in ACE, but all
  create MTC

3
Managing ACE

• Net ACE items are taxed at 15, so
• Accelerate an ACE item only when there is an
  unused negative ACE carryforward
• Reduce AMTI without an ACE increase marginal
  tax reduction 5 pct points
• Avoid matching regular-tax or AMT tax accounting
  timing elections to ACE lose PV of 20 tax
  increase

4
ACE Depreciation

• Adjustment only for assets placed in service
  pre-1994
• Assets have separate ACE basis, gain/loss
• Method ADS computations
• Prior to 1990 acquisitions Start using ADS on
  the 1/1/90 tax basis, or switch or straight line
  then
• Taxpayer with these assets may have negative ACE
  now as a result

5
ACE Adjustments to Get to CEP

• Gross income -- In CEP, not in AMTI
• Eg Life insurance proceeds AND inside build-up
• Muni bond interest
• Related party, wash sale losses disallowed
• Not like-kind exchange, lessee improvements
• Permanent exclusions only
• Not tax refunds, 108, 118 items
• Offsetting deductions allowed

6
More ACE Adjustments from CEP

• Deductions Reverse out if in AMTI, not in CEP
• Eg, 70 Dividends received deduction
• Dividend paid to ESOP
• Special ACE rules
• IDCs, must use 60 month amortization
• Add back all circulation, org expense
  amortization
• or to get LIFO to FIFO
• No installment method allowed on any sale

7
Additional ACE Adjustments

• Only cost depletion allowed
• Rule does not apply to independent oil/gas
  developers
• ACE on a consolidated return
• Use group-level computations
• Including the negative ACE limitation
• Note No such item as Consolidated EP
• ACE of a foreign corporation
• Use only effectively connected income items

8
Tax Credits and AMT

• Election to take credit for foreign taxes (rather
  than deduction) is binding for AMT
• FTC income baskets apply for AMT too
• Can use regular-tax numerators for foreign-source
  income instead of AMT-sourcing

9
Applying Tax Credits

• Credits available against regular tax in this
  order
• Child, adoption (not limited to TMT)
• Child care, elderly
• Foreign tax credit
• Business credits
• Minimum tax credit
• Refundable credits (withholding, estimates,
  overpayments, earned income)