R4_M5: Corporate AMT.

AMT Exemption. Facts: Assume alternative minimum taxable income is $210,000. Required: Calculate the allowance AMT Exemption. Solution:

$210,000 Minimum taxable income Less: $150,000 Allowable. = 60,000 excess. x 25%. = 15,000 disallowed. $40,000 exemption. Less: 15,000 disallowed. =$25,000 exemption-allowed.

(1). Regular Taxable Income.

(1.1).Adjustment. (1.2). Preferences.

Calculation of AMT. (1). Regular Taxable Income. (2). Adjusted Current Earnings ["ACE"]. (3). Alternative Tax Net Operating Loss Deduction [ATNOLD]:

(4). Exemption Amount: (5). Tax Rate: (6). AMT Foreign Tax Credit: (7). Minimum Tax Credit [MTC]:

Step 1: Determine regular taxable income and calculate the regular income tax liability. $500,000 sales receipts less cost of cost of goods sold. Add: $50,000 dividends received from a 50% owned company.

= $550,000 Gross income from all sources. Less: $200,000 ordinary and necessary business expenses. Less: $40,000 80% dividends-received deduction. Less $55,000 Depreciation expense. = $255,000 taxable income. Regular tax liability $82,700.

Step 2: Calculate unadjusted alternative minimum taxable income, the ACE adjustment, and determine whether taxpayer is in an AMT position. $255,000 taxable income.

Add preference items: $10,000 tax-exempt interest from private activity bonds [note that the municipal bond interest is not included here, only the interest from private activity bonds.]

Depreciation Adjustment. Facts: Candler corporation has calculated taxable income of $500,000 for regular income tax reporting purposes. The depreciation deduction calculated using MACRS and taken for regular income tax purposes, was $18,000.

Depreciation calculated for alternative minimum tax purposes was $17,000. Required: determine the depreciation adjustment for AMT purposes.

☐ credit against future regular tax : forward forever. the AMT system is actually an alternative tax system and, in a true sense, just an acceleration of the payment of a corporation's income taxes.

For this reason, a corp. that pays AMT in one year may use this AMT as a credit in future years against the corporation's regular income tax liability.

(1). corporations exempt from AMT. Certain smaller C corp. are exempt from AMT. the exemption applies if the annual average gross receipts from the previous three periods are $7.5 million or less. This amount is $5 million for a C corp.'s first three years of existence.

In addition, the corp. must have been treated as a small corp. exempt from AMT for all prior tax years [after 1997]. Once the corp. loses its small corp. status, it cannot qualify for any subsequent tax year. A C corp. is exempt from AMT in its first year of existence.

Add or subtract adjustment items: $20,000 Excess depreciation taken for regular tax purpose [$55,000 -$30,000] $290,000 unadjusted alternative minimum taxable income. Add: $5,250 ACE adjustment. = $295,250. Alternative minimum taxable income.

Less 33,687.50 exemption $40,000 -[[$295,250 -$150,000]][if negative result, $0]. x 20% AMT base. =$58,312.50 tentative minimum tax. 82,700 regular tax tax liability [because regular tax is greater than AMT, XYZ will not be in an AMT position.] 82,700 pay greater.

ACE Adjustment Calculation. Facts: Maple Corp. reported unadjusted alternative minimum taxable income in the amount of $50,000. Maple Corp. had received $2,000 of municipal bond interest during the year that was exempt for regular income tax purposes.

Maple Corp. also had taken a 70 percent dividends-received deduction in the amount of $3,000 and $1,500 of amortization related to organizational expenditures. Required: Calculate Maple Corp.'s adjusted current earnings adjustment.

Real property (buildings) is subject to the mid-month convention under MACRS.

Only personal property (machinery & equipment) is subject to the half-year and/or midquarter conventions.

ACE Adjustment Calculation. Facts: 1. Unadjusted alternative minimum taxable income is $100,000; and 2. Adjusted current earnings is calculated as $200,000.

Required: Calculate alternative minimum taxable income.

Solution: First, Maple must calculate adjusted current earnings. This is calculated as follows: $50,000 Unadjusted AMTI Plus: $2,000 municipal bond interest. Plus: $3,000 70 percent dividends-received deduction. Plus: $1,500 organizational expense amortization. =$56,500 Adjusted current earnings.

Second , the adjusted current earnings adjustment is calculated by multiplying 75 percent by $6,500 [the difference between unadjusted AMTI of $50,000 and $56,500]. The ACE adjustment is a positive $4,875 [75% x $6,500].

(2). Adjusted Current Earnings ["ACE"].

Step 1 in calculating the ACE adjustment is to determine adjusted current earnings. Step 2 is the calculation of the actual ACE adjustment.

AMT Calculation for a taxpayer in an AMT position.

Step 1.

AMT Calculation for a taxpayer in an AMT Position. (continue)

Step 2.

Step 2: the adjusted current earnings [ACE] adjustment equals 75 percent of the difference [positive or negative] between ACE and AMTI before this adjustment and the alternative tax NOL deduction.

The ACE adjustment can be negative; however, the amount of the negative adjustment in a particular tax year cannot be greater than the cumulative net positive ACE adjustments [prior positive adjustments less prior negative adjustments] in previous years.

☐ Depreciation adjustment for Property placed into service after December 31, 1998:

The difference between depreciation for regular tax purposes and depreciation for alternative minimum tax purposes is an adjustment item.

(4). Exemption Amount: as part of the alternative minimum tax calculation, the taxpayer is allowed an AMT exemption. The exemption functions in a manner similar to the standard deduction for individuals and prevents some corporations from being subject to the AMT.

The exemption amount is subtracted from the taxpayer's AMTI. The exemption amount is $40,000 less 25 percent of AMTI in excess of $150,000. As a result, the exemption amount is completely eliminated at AMT in excess of $310,000 [[$310,000 -$150,000] x 25%= $40,000]

Negative ACE Adjustments. Longleaf Corp. began the tax year with a cumulative net positive ACe adjustment of $60,000. For the current tax year, Longleaf calculated a negative ACE adjustment of $8,000.

The negative ACE adjustment of $8,000 is not limited because Longleaf has a cumulative net positive adjustment which is greater than the current year negative adjustment.

AMT Calculation for a Taxpayer Not in AMT Position. XYZ Corp., a C Corp., had the following activity in the current year. Assume that XYZ does not qualify as a small corp. exempt from AMT.

XYZ has a cumulative positive ACE adjustment at the beginning of the year of $45,000.

☐ Depreciation adjustment for property placed into service after 1986 and before 1999. (2). For alternative minimum tax purposes, the 150 percent declining balance

[with a switch to straight-line] for personal property using the applicable class life must be used. Any difference between AMT depreciation and the regular tax depreciation, which would be computed using the 200 percent declining method, would be an adjustment item.

☐ Private Activity Bond.

a preference exists for tax-exempt interest from certain private activity bonds issued after August 7, 1986. Tax-exempt interest on private activity bonds issued in 2009 or 2010 is however, not an AMT preference item.

☐ Pre-1987 ACRS Depreciation.

a preference exists for the excess of ACRS accelerated depreciation over straight-line on pre-1987 property.

☐ Percentage Depletion.

a preference exists for the excess of percentage depletion over the adjusted basis of the property.

* adjusted current earnings would be unadjusted alternative minimum taxable income of $290,000 + municipal bond interest of $5,000 +$2,000 [$30,000 -$28,000] excess depreciation taken for AMT purposes = $297,000.

adjusted current earnings adjustment is calculated as [$297,000 -$290,000] x 75% = $5,250. We do not have to worry about the cumulative positive adjustment of $45,000 since we do not have a current year negative ACE adjustment.

☐ Step1 :

adjusted current earnings is equal to unadjustd alternative minimum taxable income adjusted by the following primary items[ see form 4626 for full list of ACE adjustments]

Solution: the ACE adjustment is $75,000 calculated as 75% x $100,000 [$200,000 adjusted current earnings less $100,000 unadjusted alternative minimum taxabable income].

alternative minimum taxable income is $175,000, which is the unadjusted alternative minimum taxable income of $100,000 plus the positive ACE adjustment of $75,000.

☐ installment sales-dealer:

an adjustment is calculated for the difference between full accrual revenue and installment sales revenue. the installment sale method is not allowed for alternative minimum tax purposes.

(1.1).Adjustment. when calculating AMT, adjustments are items the taxpayer will either add back or subtract from regular taxable income depending on the treatment of the item for AMT purposes. Adjustments result from timing differences

between the regular calculation of corporate taxable income and the AMT calculation. For example, if a corporation's depreciation deduction is $100,000, and AMT only allows $70,000, then the $30,000 timing difference would be an adjustment added back to income.

When computing a corporation's income tax expense for estimated income tax purposes,

both corporate tax credits and the alternative minimum tax should be taken into account.

(M). municipal bond interest is added back. (O). any deduction related to organizational expense amortization is added back to AMTI. (L). life insurance proceeds on a key employee are added back. (D). the difference between AMT depreciation and ACE depreciation may need to be added back or subtracted

from AMTI depending on which is the larger amount [If AMT depreciation is higher than ACE, the difference is added back]. (D). the amount taken for the 70 percent dividends-received deduction is added back. the total after adjustments for the above items is called adjusted current earnings [ACE].

AMT Summary:

if a corporation's tentative minimum tax exceeds the regular tax, the excess amount is the alternative minimum tax, which is payable in addition to the regular tax.

☐ Adjustments for Gain / loss: when an asset is depreciated differently for calculating regular tax and AMT, its adjusted basis will also differ from regular tax and AMT. When the asset is sold, the corp. will likely then recognize different gain or loss for regular tax as compared to AMT.

if the regular tax gain is greater than AMT gain because of excess depreciation for regular tax purposes, a corp. will make a negative adjustment to regular taxable income.

(1.2). Preferences. for AMT purposes, preferences are items that are typically not taxed for regular tax purposes, but are added back for AMT purposes. Whereas adjustments may be added back or subtracted from taxable income in calculating AMTI,

tax preference items are always added back to taxable income. These add-backs ensure the corporation pays a minimum amount of tax. these adjustments can be thought of as related to timing differences, whereas preferences are related to permanent differences.

XYZ had the following additional activities, which are relevant for calculating alternative minimum taxable income:

tax-exempt interest from private activity bonds $10,000. tax-exempt interest from municipal bonds [not classified as private activity bonds]. $5,000. Depreciation for AMT purposes for property placed in service after 1986 30,000. Depreciation for ACE purposes 28,000.

(3). Alternative Tax Net Operating Loss Deduction [ATNOLD]: similar to regular tax, AMT allows a deduction for a net operating loss, figured according to AMT rules [the excess of deductions allowed for AMTI over income allowed in computing AMTI ].

the ATNOLD is generally limited to 90% of AMTI, determined without regard to the ATNOLD and any domestic production activities deduction.

(6). AMT Foreign Tax Credit:

the alternative minimum tax foreign tax credit [AMTFTC] is the only credit allowed against tentative minimum tax.

Negative ACE Adjustments. Assume instead that at the beginning of the year, Longleaf had a cumulative net positive adjustment of only $2,000. in this scenario, Longleaf Corp.'s negative ACE adjustment would be limited to $2,000,

the cumulative net positive ACE adjustment at the beginning of the tax year. there is no carryover of unused negative amounts, so the additional $6,000 negative adjustment would be lost.

Solution:

the depreciation adjustment to taxable income for determining alternative minimum taxable income will be $1,000. This $1,000 will be added back to taxable income to calculate unadjusted alternative minimum taxable income.

Preference Item. Facts: Candler Corp. owns a bond that had been issued by the city of Annapolis in a year after 2010 to fund a privately owned manufacturing plant that would bring new jobs to the area. although the bond was issued by a municipality,

the interest would not be exempt from AMT because the bond is considered a private activity bond. interest earned in the current tax year on the bond was $800. Required: determine if there will be an adjustment to taxable income for the calculation of unadjusted alternative minimum taxable income

Corporate Alternative Minimum Tax Overview. corporations are subject to a minimum tax [AMT] of 20 percent on alternative minimum taxable income [AMTI], less an exemption amount.

the objective of the corporate AMT, like that of the individual AMT, is to ensure that every corporation with substantial economic income pays at least some minimum amount of tax despite the use of exclusions, deductions and credits. (1). corporations exempt from AMT.

☐ long-term contracts: An adjustment is calculated for the difference between revenue calculated under the completed-contract method and revenue calculated under the percentage-of-completion method.

the percentage-of-completion method must be used for alternative minimum tax purposes [except for home construction contracts].

(5). Tax Rate:

the tax rate on the alternative minimum taxable income is a flat 20 percent.

☐ carryforward of MTC [not back].

the unused MTC may be carried forward indefinitely, but it may not be carried back.

Preference Item. Solution:

this interest is tax-exempt for calculating taxable income but must be added back to taxable income when calculating unadjusted alternative minimum taxable income.

(2). Adjusted Current Earnings ["ACE"]. The ACE adjustment is included to ensure that corporations do not report a profit for financial statement purposes but pay little or no income taxes. Because the ACE adjustment is intended

to reflect the economic position of the company and capture sources of economic income that may not be reflected in the alternative minimum taxable base, the calculation of the adjustment is similar to the calculation of earnings and profits of a corp.

☐ Depreciation adjustment for Property placed into service after December 31, 1998: After 1998, the same convention and recovery methods are generally used for regular depreciation and AMT. The one exception is that property depreciated for regular tax purposes

using the 200 percent declining balance method [typically 3-, 5-,7-, or 10- year property under the modified accelerated cost recovery system ["MACRS"]] must be depreciated using the 150 percent declining balance method for alternative minimum tax purposes.

(1). Regular Taxable Income. Alternative minimum taxable income begins with regular taxable income or [loss] before NOL,

which is then modified by adjustments, tax preference items, and the adjusted current earnings [ACE] adjustment.

☐ Depreciation adjustment for property placed into service after 1986 and before 1999. (1). for alternative minimum tax purposes, real property must be depreciated using the alternative depreciation system [ADS],

which requires the straight-line method over 40 years. The difference between regular tax depreciation [which would use a recovery period of 27.5 years, 31.5 years, or 39 years], and AMT depreciation is an adjustment item.

(1.2). Preferences. Note: Remember, once you add or subtract adjustments and add preferences, you now have unadjusted alternative minimum taxable income [unadjusted AMT].

☐ Percentage Depletion. ☐ Private Activity Bond. ☐ Pre-1987 ACRS Depreciation.

(7). Minimum Tax Credit [MTC]:

☐ credit against future regular tax : forward forever. ☐ carryforward of MTC [not back].

The CPA Examination has focused the majority of their questions concerning corporate minimum tax on the following four areas:

☐ distinguishing "adjustments," "preferences," and "ACE." ☐ the exemption formula. ☐ Credits available to reduce the minimum tax. ☐ the minimum tax credit carryforward-- to reduce future regular tax.

Example of adjustments are as follows: ☐ Adjustments for Gain / loss: ☐ long-term contracts:

☐ installment sales-dealer: ☐ Depreciation adjustment for property placed into service after 1986 and before 1999. ☐ Depreciation adjustment for Property placed into service after December 31, 1998: