McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved.

ChapterChapter66

Business Incentive ProvisionsBusiness Incentive Provisions

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IncentivesIncentives

Exemption of certain types of income from tax

Increased or accelerated deductionsCreditsPreferential tax rates

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Popular Tax Incentives Popular Tax Incentives

Limited expensing of depreciable assetsAdditional first year depreciationResearch activities creditRenewal Communities, empowerment

zones and enterprise communities

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Popular Tax IncentivesPopular Tax Incentives

Low income housing credit New markets credit Disability access credit Deduction and credit for alternative-

burning fuel vehicles

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General Business CreditGeneral Business Credit

Encompasses all credits previously listed plus some additional

Limitation: Lesser ofNet regular tax liability minus tentative minimum

tax25% of regular income tax in excess of $25,000

Carryovers:One year back20 years forward

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Alternative Minimum TaxAlternative Minimum Tax

Theory: Ensure that taxpayers with economic income do not excessively exploit “loopholes” and pay some tax

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AMT FormulaAMT Formula

Taxable Income+ Net operating loss deduction+ AMT preferences± AMT adjustments- AMT net operating loss deductions Alternative minimum taxable income AMT exemption AMT baseX AMT rate Tentative minimum tax - Regular tax Alternative minimum tax

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AMT PreferencesAMT Preferences

Interest from private activity municipal bonds

Excess percentage depletion from oil and gas wells

Excess intangible drilling costsAccelerated depreciation from pre-1987

real property

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AMT AdjustmentsAMT Adjustments

DepreciationAmortization of mining and exploration

costsGain or loss on depreciable propertyIncome from long term contractsInstallment salesAdjusted current earnings

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Adjusted Current Earnings Adjustment

Adjusted Current Earnings Adjustment

75% of difference between adjusted current earnings and taxable income after AMT adjustments and preferences

Theory: ensure that economic income is taxed

Adjustment can be negative up to the prior positive adjustments in previous years

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Adjusted Current EarningsAdjusted Current Earnings

Starting point: taxable income after AMT preferences and adjustments

Items that affect economic income but not taxable income added or subtractedIncludes both permanent and temporary

differences

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Items Affecting Adjusted Current Earnings

Items Affecting Adjusted Current Earnings

Tax exempt interest (other than from private activity bonds)

70% dividends received deductionLife insurance proceedsIncrease in cash surrender value of life

insuranceAmortization or organization expensesLIFO reserveNondeductible related party losses

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AMT Net Operating Loss Deduction

AMT Net Operating Loss Deduction

Computed taking into account AMT preferences and adjustments

Limited to 90% of income before net operating loss

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AMT ExemptionAMT Exemption

$40,000Phases out at a rate of 25% of alternative

minimum tax base above $150,000Completely phased out at alternative minimum

base of $310,000

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AMT Rates and CreditsAMT Rates and Credits

Flat 20% rateOnly credit is foreign tax credit

Limited to 90% of tentative minimum tax

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Minimum Tax CreditMinimum Tax Credit

Created in any year taxpayer pays AMTCredit against regular tax

Cannot reduce regular tax below tentative minimum tax

Can be carried forward indefinitely

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Effect of AMT on IncentivesEffect of AMT on Incentives

May reduce effect of accelerated deductions or income exclusions since these may generate preferences of adjustments