Ch15 - 2015

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2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ebsite, in hole or in part.

Comprehensive Volume

1

Chapter 15

Alternative Mini!u!"a#

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"he $ig %icture &slide 1 o' 2(

) $ob and Carol are un!arried individuals ho havebeen engaged 'or 'our !onths. "hey or* 'or thesa!e e!ployer and+ "hey earn identical co!pensation.

+ "hey have the sa!e a!ount o' gross inco!e, including thesa!e a!ount o' invest!ent inco!e, hich consists solelyo' interest inco!e.

+ "hey have si!ilar invest!ents in ta#e#e!pt bonds thatproduce identical a!ounts o' interest inco!e.

+ "hey also have the sa!e a!ount o' deductions.

) Carol learns that she paid -15,000 !ore in ederalinco!e ta#es than $ob did 'or the ta# year.

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"he $ig %icture &slide 2 o' 2(

) "he above events raise a nu!ber o' interesting/uestions 'or $ob and Carol that can be ansereda'ter co!pleting this chapter.+ hy didnt $ob and Carol have the sa!e ta# liability

+ ere both ta# returns properly prepared+ 3hould Carol consider replacing her ta# return preparer Ava

ith Ada!+ 4s it possible andor desirable 'or Carol to 'ile an a!ended

return+ 3hould $ob do anything

) Read the chapter and 'or!ulate your response.

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Alternative Mini!u! "a# &AM"(

) AM" is separate 'ro!, but parallel to, the

regular inco!e ta# syste!

)"he AM" co!putation reconciles ta#ableinco!e, through ad6ust!ents and pre'erences,

ith Alternative Mini!u! "a#able 4nco!e

&AM"4(

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Co!putation o' AM"

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AM" Ad6ust!ents And %re'erences&slide 1 o' 7(

) Most AM" ad6ust!ents relate to ti!ing di''erences+ "i!ing di''erences eventually reverse

) %ositive ad6ust!ents ill be o''set by negative ad6ust!ents in the 'uture,and vice versa

+ 8#a!ple circulation e#penditures) or regular inco!e ta# purposes, circulation e#penditures can be deductedin the year incurred

) or AM" purposes, hoever, circulation e#penditures !ust be deductedover a threeyear period

) Certain AM" ad6ust!ents do not relate to ti!ing di''erences+ "hese ad6ust!ents result in a per!anent di''erence beteen ta#able

inco!e and AM"4) e.g., 4te!i9ed deductions

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) AM" %re'erences

+:esigned to ta*e bac* all or part o' the ta# bene'its

obtained by certain ite!s in the co!putation o'

ta#able inco!e 'or regular inco!e ta# purposes) "a#able inco!e is increased by ta# pre'erence ite!s

e''ectively disalloing those ta# bene'its 'or AM"

purposes

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) "a# pre'erences include;+ %ercentage depletion in e#cess o' basis

+ 8#cess intangible drilling costs

+ 4nterest on certain private activity bonds+ 8#cess o' accelerated over straightline depreciation on real

< leased personal property placed in service be'ore 1=>?

+ 8#cess o' a!orti9ation alloance over depreciation on pre1=>? certi'ied pollution control 'acilities

+ ?@ o' the e#clusion 'ro! gross inco!e o' gains on the saleo' certain s!all business stoc*

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ther Co!ponents o' AM"&slide 1 o' 7(

) 8#e!ption a!ount

+"he e#e!ption reduces AM"4 to arrive at the base

on hich AM" is co!puted

+"he initial e#e!ption a!ount in 201B is;

) -52,>00 'or single

) ->2,100 'or !arried, 'iling 6ointly

) -B1,050 'or !arried, 'iling separately+"he e#e!ption is phased out at a rate o' 25 cents

on the dollar hen AM"4 e#ceeds certain a!ounts

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) or 201B, the e#e!ption and phaseout

a!ounts are as 'ollos;

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) AM" rates

+A progressive rate structure is applied to the ta#

base &AM"4 less e#e!ption a!ount(

) 2@ on 'irst -1>2,500 &-=1,250 'or !arried, 'iling

separately( o' ta# base

) 2>@ on re!aining a!ount o' ta# base

+Det capital gain and /uali'ied dividend inco!eincluded in AM" base are ta#ed at 'avorable

alternative ta# rates &0@, 15@, or 20@(

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%ersonal "a# Credits

) $eginning in 2012, personal nonre'undable

credits are alloed to o''set any AM" liability

as ell as any regular ta# liability

+e.g., Adoption Credit, Li'eti!e Learning Credit,

and Retire!ent 3avings Contribution Credit

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AM" Ad6ust!ents&slide 1 o' 15(

) Ad6ust!ents tend to arise 'ro! ti!ing

di''erences beteen regular ta# and AM"

+Ad6ust!ents can be positive or negative, and ill

generally reverse in later years

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Ad6ust!ents&slide 2 o' 15(

) "he AM" depreciation ad6ust!ent 'or real

property applies only to real property placed in

service be'ore Eanuary 1, 1===

) or real property placed in service a'ter

:ece!ber 71, 1==>, MACR3 recovery periods

apply 'or AM"

+"hus, the AM" ad6ust!ent is e''ectively

eli!inated

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) or real property placed in service a'ter 1=>

&MACR3 property( and be'ore Eanuary 1,

1===

+AM" depreciation is co!puted under the

alternative depreciation syste! &A:3(

) Fses the straightline !ethod over a B0year li'e

+Regular ta# MACR3 lives are 2?.5, 71.5, and7= years

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Ad6ust!ents&slide B o' 15(

) :epreciation o' post1=> personal property+AM" !ethod is 150@ :$ over A:3 li'e

+Regular ta# is generally MACR3 !ethod based on

200@ :$ over shorter lives) 8''ective 'or personalty placed in service a'ter

1271=>, MACR3 recovery periods are to be

used 'or AM"+4' 150@ :$ is elected 'or this property, there is noAM" ad6ust!ent

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) %ollution control 'acilities

+:epreciate under the A:3 over appropriate class

li'e 'or AM"

) A!orti9e over 0 !onths 'or regular ta# purposes

+8''ective 'or pollution control 'acilities placed in

service a'ter 1271=>, MACR3 recovery periods

are to be used 'or AM"

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Ad6ust!ents&slide o' 15(

) Circulation e#penditures

+A!orti9ed over 7 years 'or AM"

) 8#pensed in year incurred 'or regular ta#

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Ad6ust!ents&slide ? o' 15(

) Mining e#plorationdevelop!ent costs and

researche#peri!ental e#penditures

+A!orti9ed over 10 years 'or AM"

) 8#pensed in year incurred 'or regular ta# purposes

+"a#payer !ay elect to capitali9e and a!orti9e over

10 years 'or regular ta# purposes and thus avoid

the AM" ad6ust!ent

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Ad6ust!ents&slide > o' 15(

) Co!pleted contract !ethod

+AM" re/uires the use o' percentage o' co!pletion

!ethod 'or longter! contracts rather than

co!pleted contract !ethod

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Ad6ust!ents&slide = o' 15(

) 4ncentive stoc* options &43s(

+"he e#ercise o' an 43 can cause inco!e 'or AM"

purposes that is not currently ta#able 'or regular

ta# purposes) 8#cess o' MG over e#ercise price is ad6ust!ent in the

ta#able year in hich the option is e#ercised

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) Ad6usted gain or loss

+3ince the ad6usted basis o' an asset can be di''erent

'or regular ta# and AM", gain or loss recogni9ed

upon the disposition o' an asset !ay vary 'or theto ta# syste!s

+:i''erence beteen regular ta# gain &loss( and

AM" gain &loss( is ad6ust!ent

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) %assive activity losses Dot deductible in co!puting

either the regular inco!e ta# or the AM"

+ %assive losses !ust still be reco!puted 'or AM" using

AM" provisions

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) Det operating loss &DL(

+DL !ust be reco!puted 'or AM" using AM"

provisions

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) 4te!i9ed deductions alloed 'or AM"

purposes include;) Casualty losses

) Ha!bling losses

) Charitable contributions

) Medical e#penses in e#cess o' 10@ o' AH4

) 8state ta# attributable to 4R:

) Iuali'ied interest

+ May di''er 'ro! regular ta# since only student loan, /uali'ied

residence, and invest!ent interest are deductible 'or AM"

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Ad6ust!ents&slide 1B o' 15(

) 4te!i9ed deductions not alloed 'or AM";

+"a#es and !iscellaneous ite!i9ed deductions

sub6ect to the 2@ AH4 li!it

) Hross inco!e !ay include a re'und o' ta#es

deducted in prior years as an ite!i9ed

deduction

+A negative AM" ad6ust!ent is alloed 'or suchre'unds 'or AM" purposes

) "he 7@ cutbac* o' regular inco!e ta# ite!i9ed

deductions does not apply 'or AM"

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) ther ad6ust!ents

+AM" does not allo the standard deduction and

personal and dependency e#e!ptions

) "hese ad6ust!ents enter the AM"4 calculationindirectly by ad6usting the ta#able inco!e a!ount that

begins the AM"4 calculation

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%re'erences&slide 1 o' 5(

) %re'erences tend to arise because o' deductions

or e#clusions that provide substantial ta#

bene'its

+Fnli*e ad6ust!ents, pre'erences can only be

positive &i.e., increase AM"4(

+"hus, pre'erences reduce the bene'its initially

received hen co!puting regular ta#

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) %ercentage depletion

+%re'erence is the a!ount o' percentage depletion

ta*en 'or regular ta# hich is in e#cess o' the

ad6usted basis o' the property at the end o' the year

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) 4ntangible drilling costs

+:eductible currently 'or regular ta#

+"he AM" pre'erence is co!puted as 'ollos;

IDC expensed in the year incurred

Minus::eduction i' 4:C ere capitali9ed and a!orti9ed

over 10 years

Equals:8#cess o' 4:C e#pense over a!orti9ationMinus:5@ o' net oil and gas and geother!al inco!e

Equals:"a# pre'erence ite!

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%re'erences&slide B o' 5(

) 4nterest on private activity bonds

+"his interest is not ta#able 'or regular ta# purposes

but is included in inco!e 'or AM" purposes

+8#penses incurred in carrying these bonds are not

deductible 'or regular ta# purposes, but o''set the

interest inco!e in co!puting the AM" pre'erence

+4nterest on private activity bonds issued a'ter:ece!ber 71, 200> and be'ore Eanuary 1, 2011 is

not treated as a ta# pre'erence

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) 50@ e#clusion o' gain on sale o' certain s!all

business stoc* nor!ally is e#cludible 'ro!

gross inco!e 'or regular ta#

+or 200= and 2010, the 50@ is increased to ?5@

+or such stoc* ac/uired a'ter 3epte!ber 2, 2010,

and be'ore Eanuary 1, 201B, 100@ o' the gain is

e#cluded 'ro! regular ta#able inco!e+?@ o' the e#cluded a!ount is a ta# pre'erence 'or

AM"

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"he $ig %icture 8#a!ple 21

%rivate Activity $onds

) Return to the 'acts o' "he $ig %icture on p. 151.

) $ob and Carol both have invested substantial

a!ounts inprivate activity bondsall o' hich

ere issued in 2010.

+A ta# pre'erence does not result 'or either Carol or

$ob.

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AM" Credit

) AM" attributable to ti!ing di''erences is AM"

Credit

+8#cess o' AM" over AM" co!puted ithout

ti!ing di''erences

) AM" credit can be carried 'orard

&inde'initely( to be used to o''set regular

inco!e ta# liability+Cannot carrybac* or use against AM" liability

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Corporate AM"&slide 1 o' B(

) Ma6or di''erences in AM" rules 'or

corporations

+AM" rate is a 'lat 20@

+8#e!ption a!ount is -B0,000

) Reduced by 25@ o' a!ount by hich AM"4 e#ceeds

-150,000

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) Ma6or di''erences in AM" rules 'or

corporations &contd(

+Ad6usted current earnings &AC8( ad6ust!ent

) Ad6ust!ent J ?5@ K &AC8 AM"4 be'ore AC8(

) AC8 e!ploys so!e earnings and pro'its concepts but

certain di''erences e#ist

) Ad6ust!ent can be positive or negative

+ "he negative ad6ust!ent is li!ited to the aggregate positive

ad6ust!ents under AC8 'or prior years

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) AM" is repealed 'or s!all corporations 'or ta# years

beginning a'ter 1271=?

+ A corporation is classi'ied as a s!all corporation i' both o'

the 'olloing apply) 4t as treated as a s!all corporation e#e!pt 'ro! the AM" 'or allprior years beginning a'ter 1==?

) Average gross receipts 'or the 7 year period ending be'ore its

current ta# year did not e#ceed -?.5 !illion

+ -5 !illion i' the corporation had only one prior ta# year

+ oever, i' a corporation ever 'ails the gross receipts test,

it is ineligible 'or s!all corporation classi'ication in 'uture

ta# years

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Corporate AM"&slide B o' B(

) A ne corporation is auto!atically classi'ied

as a s!all corporation its 'irst ta# year o'

e#istence

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Mini!u! "a# Credit

) All o' a corporations AM" is available 'or

carryover as a !ini!u! ta# credit

+:oes not !atter hether the ad6ust!ents and

pre'erences originate 'ro! ti!ing di''erences orAM" e#clusions

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Re'ocus n "he $ig %icture

) $ob contacts Ada!, his ta# return preparer, and e#plains in ane#cited voice that he believes that he underpaid his ederalinco!e ta# liability 'or 201B by -15,000.+ e is orried about the negative e''ects o' an 4R3 audit.

) Ada! e#a!ines the to ta# returns and discovers that thedi''erence relates to the treat!ent o' the interest earned on theta#e#e!pt bonds.+ $oth $ob and Carol on ta#e#e!pt bonds, including private activity

bonds that usually are sub6ect to the AM".+ oever, Carols accountant, Ava, apparently overloo*ed the 'act that

interest on private activity bonds is not a ta# pre'erence 'or privateactivity bonds issued in 2010.

) 3o the -15,000 AM" that as reported on Carols or! 251is in error.+ $ob te#ts the good nes to Carol that she is eligible 'or a ederal

inco!e ta# re'und.

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