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ChapterChapter55
Other Corporate Tax LeviesOther Corporate Tax Levies
Alternative Minimum TaxAlternative Minimum Tax
Overview
Slide 6-3
What is the AMT?What is the AMT?
Alternative income tax system running parallel to the regular income tax systemGenerally has a broader base, lower tax rates
Objective of the AMT:To ensure taxpayers with substantial economic incomes pay some minimum amount of income tax (despite the lawful use of tax incentives)
Slide 6-4
Small CorporationsSmall 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
Slide 6-5
AMT OverviewAMT 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)
Slide 6-6
AMT OverviewAMT Overview
Alternative Minimum Taxable Income (AMTI)- AMT exemption= Taxable excessX 20%Tentative Minimum Tax
Slide 6-7
AMT OverviewAMT Overview
[IRC §55(a)] If Tentative Minimum Tax > Regular tax before credits (except FTC), then AMT payable equals the excessRegular tax is before credits except foreign tax
credits [IRC §55(c) and §26(b)]
Slide 6-8
AMT CreditAMT Credit
[IRC §53] When Tentative Minimum Tax < 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 orThe sum of AMT paid in all prior years less the
sum of AMT credits claimed in prior years
Examples 1, 2, and 3
Alternative Minimum TaxAlternative Minimum Tax
Tax Preferences and
AMT Adjustments
(other than the ACE adjustment)
Slide 6-10
AMT Tax PreferencesAMT Tax Preferences
Tax preferences are always positiveInterest 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)]
Slide 6-11
AMT AdjustmentsAMT 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)]
Slide 6-12
AMT AdjustmentsAMT Adjustments
Long-term contracts must use percentage of completion for AMT [IRC §56(a)(3)]
Loss limitations must be recalculatedU.S. production activities deduction must
be recalculated [IRC §199(d)(6)]
Alternative Minimum TaxAlternative Minimum Tax
The ACE Adjustment
Slide 6-14
Adjusted Current EarningsAdjusted Current Earnings
Adjusted current earnings [IRC §56(g)] AMTI before ACE adjustment/ Adjustments for computing ACE = Adjusted current earnings (ACE)
Slide 6-15
Adjusted Current EarningsAdjusted 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
Slide 6-16
Adjusted Current EarningsAdjusted 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
Slide 6-17
ACE AdjustmentACE 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)
Slide 6-18
ACE Adjustment – Example 1ACE Adjustment – Example 1
Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $130,000No AMT NOL carryforward
Then the ACE adjustment = 75% x (130,000 – 100,000) = $22,500
So, AMTI = 100,000 + 22,500 = $122,500
Slide 6-19
ACE AdjustmentACE 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) orThe sum of positive ACE adjustments in all
prior years over the sum of negative ACE adjustments in all prior years
Slide 6-20
ACE Adjustment – Example 2ACE Adjustment – Example 2
Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $80,000Sum of all prior year ACE adj.s = $25,000No AMT NOL carryforward
Then the ACE adjustment = 75% x (80,000 – 100,000) = ($15,000)
So, AMTI = 100,000 + (15,000) = $85,000
Slide 6-21
ACE Adjustment – Example 3ACE Adjustment – Example 3
Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $80,000Sum of all prior year ACE adj.s = $12,000No 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
Alternative Minimum TaxAlternative Minimum Tax
AMT NOL Deduction
and
AMT Exemption
Slide 6-23
AMT NOL DeductionAMT 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
Slide 6-24
AMT ExemptionAMT Exemption
Exemption [IRC §55(d)]Exemption amount is $40,000Phase-out of exemption amount:
25% * (AMTI - 150,000)Exemption cannot go below zero! (Fully
phased-out at AMTI of $310,000 or more)
Slide 6-25
AMT Exemption – ExamplesAMT Exemption – Examples
What is the exemption for a corporation with AMTI of $101,500?$40,000, AMTI < $150,000 (no phase-out)
Slide 6-26
AMT Exemption – ExamplesAMT Exemption – Examples
What is the exemption for a corporation with AMTI of $193,000?40,000–25%(193,000–150,000)= $29,250
Slide 6-27
AMT Exemption – ExamplesAMT Exemption – Examples
What is the exemption for a corporation with AMTI of $350,000?$0, AMTI > $310,000 (fully phased-out)
Slide 6-28
AMT ExamplesAMT Examples
Examples 4, 5, and 6Problems: C5-36, C5-40, C5-48