Chapter 8.Alternative

Minimum Tax Howard Godfrey, Ph.D., CPA

Professor of Accounting ©Howard Godfrey-2015

Alternative Minimum Tax (AMT)• The alternative minimum tax is designed to

impose a minimum amount of tax that a taxpayer must pay.

• Taxpayer must pay at least the minimum amount of tax

• Figured separately from regular income tax• Requires keeping a separate set of records• Not required for small corporations with

average gross receipts of less than $5,000,000

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Alternative Minimum Tax• IF AMT is greater than the regular

tax, taxpayers pay the larger amount

• Rate is 26% on first $185,400 and 28% on excess for individuals

4

Taxable income+- Adjustments (timing items, often)+ Preferences= AMTI- Exemption (unless phased out)= AMT tax basex AMT rates: (Corp-20%, Indiv- 26%, 28%)

= Tentative minimum tax- Regular income tax liability= AMT

AMT Formula - Some Steps Omitted

AMT Adjustments• Purpose is to account for effect of special

alternative rates or calculations• Most reverse due to timing differences

– Examples:• Required use of completed contract method• No gain deferral for installment sales• Recalculation of NOL; limited NOL deduction• Depreciation under ADS versus MACRS

– Not all apply to all entities• Corporation must compute Adjusted Current Earnings (ACE)• Individual: limit itemized deductions, no personal exemption,

report income from ISOs (treat as non-qualified option), etc.

AMT Adjustments - CautionThe following slide is presented to serve as a basis for discussing the general concept of different depreciation methods for:

• GAAP• Federal Income Tax• State Income Tax• AMT

The slide does not show the actual adjustment for depreciation for AMT Purposes -- just the concept.

Machine: Cost = $300, Life = 5 years

Begin DDB=40% Ending SL=20% EndingYear Bk.Val. Deprec. Bk.Val. Deprec. Bk.Val.

Year 1 300 120 180 60 240

Year 2 180 72 108 60 180

Year 3 108 22 86 60 120Sell Machine after 3 years for $100

(Tax Law allows DDB, half-year convention)

Percentage of Completed

Dollars: $millions Completion Contract

Total Price $900 $900 Cost to build $600 $600 Total Profit $300 $300

Profit - Year 1 $100 $0 Profit - Year 2 $100 $0 Profit - Year 3 $100 $300

Total Profit $300 $300

Construction Contract

AMT Preferences• Apply to all taxpayers• Always added in the computation of AMTI

– Are permanent differences and do not reverse

• Add back:– Percentage depletion in excess of basis– Limitation of intangible drilling costs

– Tax-exempt interest from private activity bonds– Excess depreciation over straight-line for property acquired

before 1987 – Part of gain exclusion on small business stock– Reserves for bad debts of financial institutions

AMT ExemptionsAMT does not affect taxpayers with

moderate income and small amounts of adjustments and/or preferences

Phased-out at rate of 25 cents for every dollar of AMTI over base

Entity Exemption Start Phase-out

Corporation $40,000 $150,000Married, joint $83,400 $158,900Single & H-of-H $53,600 $119,200Married, separate $41,700 $79,450

AMT Minimum Tax Credit• Calculated each year in which AMT applies• Designed to avoid double jeopardy caused

by timing differences– Deducted from regular tax– Amount is the difference between actual

AMT and what AMT would be without the reversal adjustments

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In 2015, Don Mills, a single taxpayer, had $70,000 in taxable income before personal exemptions. Mills had no tax preferences. His itemized deductions were as follows: State and local income taxes $5,000 Home mortgage interest on loan to acquire residence 6,000 Miscellaneous deductions that exceed 2% of AGI 2,000What amount did Mills report as alternative minimum taxable income before the AMT exemption? Answer: $77,000.

AMT Formula Item-Adj. Amount$70,000

+ Preferences+,- Adjustments

Income Tax 5,000 Home Int.Misc. Ded. 2,000

= $77,000Less: Exemption

= AMTIAMT Tax Rate (26%, 28%)

=

Don Mills -1

Taxable income

Tentative AMTI

Tentative Minimum Tax

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AMT Illustration - Joint - 1 Reg. Tax

Gross Income (Salary) 70,000

Incentive Option - Bargain at Exercise

State Taxes, Misc. Itemized Deduct. (20,000)

Subtotal 50,000

Exemptions (8 at $4,000) (32,000)

Taxable Income 18,000

Regular tax income tax-10% 1,800

AMT Illustration - Joint -2 Reg. Tax AMT

Gross Income (Salary) 70,000 70,000

Incentive Option - Bargain at Exercise 25,000

State Taxes, Misc. Itemized Deduct. (20,000) (20,000)

Subtotal 50,000 75,000

Exemptions (8 at $4,000) (32,000) (32,000)

Taxable Income 18,000 43,000

Regular tax income tax-10% 1,800

Add: Exemptions, State tax, Misc. Ded. 52,000

Alternative Min. Taxable Income 95,000

AMT Exemption (83,400)AMT Tax Base 11,600

AMT Rate 26%

AMT Illustration - Joint - 3 Reg. Tax AMT

Gross Income (Salary) 70,000 70,000 Incentive Option - Bargain at Exercise 25,000 State Taxes, Misc. Itemized Deduct. (20,000) (20,000)

Subtotal 50,000 75,000 Exemptions (8 at $4,000) (32,000) (32,000)

Taxable Income 18,000 43,000 Regular tax income tax-10% 1,800

Add: Exemptions, State tax, Misc. Ded. 52,000

Alternative Min. Taxable Income 95,000 AMT Exemption (83,400)

AMT Tax Base 11,600 AMT Rate 26%

Tentative AMT before credits 3,016 Regular tax before credits (1,800)

Difference (AMT) $1,216

AMT Credit Regular AMT AMT Compute

Year: 2015 Tax Exclusions Deferrals AMTI

Salary 400,000 400,000Incentive Option-Bargain 0 100,000 100,000AGI 400,000 500,000Personal Exemptions -8,000 8,000Charity -10,000 -10,000Primary home acq. interest -10,000 -10,000N.Carolina income tax -40,000 40,000Property taxes -40,000 40,000Total Deductions -108,000Taxable Income 292,000AMTI 88,000 100,000 480,000Ignore phase-out of Exempt. and Ded. Also AMT Exempt. phase-out.AMT Credit : AMT on $480,000, less AMT on $380,000.Basically 28% of $100,000, plus effect of AMT Exemption

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Scott and Sandy had alternative minimum taxable income of $200,000 in 2015, and file a joint return. For purposes of computing the alternative minimum tax, their AMT exemption is:

Exemption Amt. before reduction:Status: Joint 83,400 83,400$ Status: Separate 41,700Status: Other 53,600

AMTI 200,000 Phase- Joint 158,900

Out Separate 79,450Other 119,200

Excess AMTI

Phaseout - 25% of excess

Exemption allowed

Scott and Sandy - AMT Exemption

Exemption Amt. before reduction:Status: Joint 83,400 83,400$ Status: Separate 41,700

Status: Other 53,600

AMTI 200,000 Phase- Joint 158,900 (158,900)

Out Separate 79,450 N/A

Other 119,200 N/A

Excess AMTI 41,100

Phaseout - 25% of excess (10,275)

Exemption allowed 73,125$

Scott and Sandy - AMT Exemption

• Adjusted gross income $90,000Less: Deductions from AGIMedical expenses 9,200Less: 10% x $90,000 (9,000) 200Home mortgage interest 5,300Home equity loan interest 1,200State income taxes 2,325Property taxes 950Charitable contributions (cash) 575Misc. itemized deductions 2,200Less: 2% x $90,000 (1,800) 400 (11,200)Less: Exemptions (2 x $4,000) (8,000)Taxable Income $70,800

Alice and Frank - 1

What are the AMT Adjustments?

• AdjustAdjusted gross income $90,000Less: Deductions from AGIMedical expenses 9,200Less: 10% x $90,000 (9,000) 200Home mortgage interest 5,300Home equity loan interest 1,200 1,200

State income taxes 2,325 2,325

Property taxes 950 950

Charitable contributions (cash) 575Misc. itemized deductions 2,200Less: 2% x $90,000 (1,800) 400 400

Total Itemized Deductions (11,200)

Less: Exemptions (2 x $4,000) (8,000)

Taxable Income $70,800

Adjustments $4,875

Alice and Frank - 2

Adjusted gross income $90,000

Less: Deduct. from AGI (11,200)

Less: Exemptions (8,000)

Taxable Income $70,800Tax Computation:

Tax on base $18,450 $1,845

Excess over base $52,350

Rate 15% 7,853

Regular income Tax 9,698$

Alice and Frank - 3

Taxable income $70,800

AMT Adjustments

Medical expenses 0

Home equity loan interest 1,200

State income taxes 2,325

Property taxes 950

Misc. itemized deductions 400Exemptions 8,000

$12,875

AMTI $83,675

Alice and Frank - 4

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AMTI $83,675

AMT Exemption (limit next slide) (83,400)

NET AMTI Base 275

Tax - 26% of first $175,000 26%

28% of amount over $175,000

Tentative minimum tax 72

Regular income tax 9,698

Excess is AMT -$

Alice and Frank - 5

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AMT Exemption$83,400

AMTI 83,400

Threshold-$150,000, etc. 150,000

AMTI above threshold -

Phaseout - 25%

Exemption disallowed

Exemption allowed $83,400

Exemption, Before reduction

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T15FChap-08-7-AMT-Worksheet-Class-Problem-10-25-2015

Has an additional illustrative AMT Problem

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2015. AMT Information

Adj. gross income (Salary) $100,000 $100,000Private activity bond interest 80,000Less: Ded. from AGI

Medical expenses 12,000 $12,000Less: 10% of AGI (10,000) 2,000

Home mortgage interest 5,300 5,300State income taxes 3,400 3,400Charitable contributions 800 800Misc. itemized deductions 2,400 2,400

Less: 2% x $100,000 (2,000) 400 (11,900)Less: 6 Exemptions ($4,000) 6 4,000 (24,000)

Taxable Income $64,100Tax Computations: Base Rate Tax

Amount below top layer 18,450 1,845 Top layer 45,650 15% 6,848 Totals $64,100 $8,693

Joint tax return. Tax Return - Regular Tax

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Part 1 Amount

1 Regular taxable income - above. (Before NOL) $64,100

2 Addz: exemptions for self, spouse, dependents 24,000

3 Subtotal (This is where you start on Form 6251) 88,100

4 Add stand. deduction (or itemized deductions

not allowed in computing AMT). (See Below) 3,800

5 Adjust taxable income for items-other AMT method.

(Percentage of Completion, Incentive options, etc.)

6 Add AMT preferences (Private act. bond interest, etc.) $80,000

7 Subtract net operating loss allowed for AMT

8 AMTI [Combine amounts in 3-7, to get AMTI] 171,900

Summary of Computations for AMT

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Part 2. Adjustment for Itemized Deductions

17 Enter Adjusted Gross Income $100,000

18 State and local income taxes 3,400

19 Misc. Itemized Deductions (after 2% floor) 400

20 Total Adjust. for Itemized Ded.(line 4 above) 3,800

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Part 3. AMT Exemption21 Amount of Exemption Before Reduction $82,10022 AMTI from 8 above 171,900

23 Threshold (Joint $158,900, etc.) 158,900

24 Excess of AMTI over threshold 13,000

25 Phaseout percentage - 25% 25%

26 Exemption disallowed 3,250

27 Exemption allowed $78,850

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8 AMTI [Combine amounts in 3-7, to get AMTI] 171,900

9 Subtract "AMT Exemption " (Note limit) (78,850)

10 Taxable Excess- Base for AMT Tax Computation 93,050

11 Tax on line 10 Up to: 185,400 26% 93,050 24,193

above: 185,400 28% 0 0

12 Subtract foreign tax credit

13 Subtotal - This is tentative minimum tax 24,193

14 Regular income tax from pg 2 of Form 1040 Top of pg $8,693

15 If Line 13 exceeds Regular tax (Line 14), excess is AMT $15,501

Pt 3 below

End