Other Corporate Tax Levies

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Other Corporate Tax Levies
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Chapter
2
Alternative Minimum Tax

• Overview

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What is the AMT?

• Alternative income tax system running parallel to
  the regular income tax system
• Generally has a broader base, lower tax rates
• Objective of the AMTTo ensure taxpayers with
  substantial economic incomes pay some minimum
  amount of income tax (despite the lawful use of
  tax incentives)

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Small Corporations

• Small corporation exemption IRC 55(e)-
  Average annual gross receipts for prior 3
  years less than 7.5 million - Controlled groups
  are aggregated- Special rules for initial years

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AMT Overview

• Regular taxable income NOL carryforward
  deducted (if any) Tax preferences (if
  any)/- AMT adjustments other than ACE (if
  any) AMTI before ACE adjustment/- ACE
  adjustment (if any) AMTI before AMT
  NOL deduction- AMT NOL deduction (if any)
  Alternative Minimum Taxable Income (AMTI)

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AMT Overview

• Alternative Minimum Taxable Income (AMTI)-
  AMT exemption Taxable excessX
  20Tentative Minimum Tax

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AMT Overview

• IRC 55(a) If Tentative Minimum Tax gt Regular
  tax before credits (except FTC), then AMT payable
  equals the excess
• Regular tax is before credits except foreign tax
  credits IRC 55(c) and 26(b)

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AMT Credit

• IRC 53 When Tentative Minimum Tax lt regular
  tax, an AMT credit is allowed as a reduction of
  regular taxes payable
• The AMT credit is limited to the lesser of
• Regular tax less the tentative minimum tax or
• The sum of AMT paid in all prior years less the
  sum of AMT credits claimed in prior years
• Examples 1, 2, and 3

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Alternative Minimum Tax

• Tax Preferences and
• AMT Adjustments
• (other than the ACE adjustment)

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AMT Tax Preferences

• Tax preferences are always positive
• Interest income from private activity bonds
  issued after August 8, 1986 IRC 57(a)(5)
• Excess percentage depletion from oil and gas
  wells IRC 57(a)(1)
• Excess intangible drilling costs from oil, gas,
  etc. properties IRC 57(a)(2)

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AMT Adjustments

• Depreciation
• Real property placed in service after 1986 and
  before 1999 IRC 56(a)(1)
• Tangible personal property placed in service
  after 1986 and before 2005 IRC 56(a)(1)
• AMT basis in excess of regular tax basis for
  property dispositions IRC 56(a)(6)

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AMT Adjustments

• Long-term contracts must use percentage of
  completion for AMT IRC 56(a)(3)
• Loss limitations must be recalculated
• U.S. production activities deduction must be
  recalculated IRC 199(d)(6)

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Alternative Minimum Tax

• The ACE Adjustment

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Adjusted Current Earnings

• Adjusted current earnings IRC 56(g)
  AMTI before ACE adjustment/- Adjustments for
  computing ACE Adjusted current earnings
  (ACE)

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Adjusted Current Earnings

• Adjustments for ACE IRC 56(g)(4)
• () Tax-exempt interest income (excluding PAB
  interest income that is a tax preference)
• (-) Disallowed expenses and interest allocable
  to tax-exempt income
• () Proceeds from key-man life insurance
• (-) Premiums paid on key-man life insurance
• () 70 DRD actually deducted
• (/-) LIFO inventory method not allowed

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Adjusted Current Earnings

• Adjustments for ACE IRC 56(g)(4)
• (/-) Depreciation on assets placed in service
  1/1/90 through 12/31/93
• (-) Ace basis in excess of AMT basis for property
  dispositions of assets above
• () Amortization of organizational costs incurred
  after 1989
• (/-) Installment method not allowed

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ACE Adjustment

• IRC 56(g)(1) If the Adjusted Current Earnings
  (ACE) exceed the pre-ACE adjustment AMTI, then
  the positive ACE adjustment equals 75
  (ACE less pre-ACE adj. AMTI)

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ACE Adjustment Example 1

• Assume
• AMTI before the ACE adjustment 100,000
• Adjusted current earnings (ACE) 130,000
• No AMT NOL carryforward
• Then the ACE adjustment 75 x (130,000
  100,000) 22,500
• So, AMTI 100,000 22,500 122,500

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ACE Adjustment

• IRC 56(g)(2) If the Adjusted Current Earnings
  (ACE) are less than the pre-ACE adjustment AMTI,
  then the negative ACE adjustment equals the
  lesser of
• 75 (Pre-ACE adj. AMTI less ACE) or
• The sum of positive ACE adjustments in all prior
  years over the sum of negative ACE adjustments in
  all prior years

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ACE Adjustment Example 2

• Assume
• AMTI before the ACE adjustment 100,000
• Adjusted current earnings (ACE) 80,000
• Sum of all prior year ACE adj.s 25,000
• No AMT NOL carryforward
• Then the ACE adjustment 75 x (80,000
  100,000) (15,000)
• So, AMTI 100,000 (15,000) 85,000

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ACE Adjustment Example 3

• Assume
• AMTI before the ACE adjustment 100,000
• Adjusted current earnings (ACE) 80,000
• Sum of all prior year ACE adj.s 12,000
• No AMT NOL carryforward
• Then the ACE adjustment 75 x (80,000
  100,000) (15,000) Limited to (12,000)
• So, AMTI 100,000 (12,000) 88,000

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Alternative Minimum Tax

• AMT NOL Deduction
• and
• AMT Exemption

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AMT NOL Deduction

• IRC 56(a)(4) and (d)(2) NOL carryover is
  determined after all AMT adjustments in the year
  originated
• IRC 56(d)(1) Limited to 90 of AMTI before the
  NOL deduction

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AMT Exemption

• Exemption IRC 55(d)
• Exemption amount is 40,000
• Phase-out of exemption amount 25 (AMTI -
  150,000)
• Exemption cannot go below zero! (Fully phased-out
  at AMTI of 310,000 or more)

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AMT Exemption Examples

• What is the exemption for a corporation with AMTI
  of 101,500?
• 40,000, AMTI lt 150,000 (no phase-out)

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AMT Exemption Examples

• What is the exemption for a corporation with AMTI
  of 193,000?
• 40,00025(193,000150,000) 29,250

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AMT Exemption Examples

• What is the exemption for a corporation with AMTI
  of 350,000?
• 0, AMTI gt 310,000 (fully phased-out)

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AMT Examples

• Examples 4, 5, and 6
• Problems C5-36, C5-40, C5-48