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5. Chapter. Other Corporate Tax Levies. Alternative Minimum Tax. Overview. What is the AMT?. Alternative income tax system running parallel to the regular income tax system Generally has a broader base, lower tax rates

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what is the amt
What is the AMT?
  • Alternative income tax system running parallel to the regular income tax system
    • Generally 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)
small corporations
Small 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
amt overview
AMT 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)
amt overview1
AMT Overview
  • Alternative Minimum Taxable Income (AMTI)- AMT exemption= Taxable excessX 20%Tentative Minimum Tax
amt overview2
AMT Overview
  • [IRC §55(a)] If Tentative Minimum Tax > Regular tax before credits (except FTC), then AMT payable equals the excess
    • Regular tax is before credits except foreign tax credits [IRC §55(c) and §26(b)]
amt credit
AMT 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 or
    • The 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 tax1

Alternative Minimum Tax

Tax Preferences and

AMT Adjustments

(other than the ACE adjustment)

amt tax preferences
AMT Tax Preferences
  • Tax preferences are always positive
    • Interest 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)]
amt adjustments
AMT 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)]
amt adjustments1
AMT Adjustments
  • Long-term contracts must use percentage of completion for AMT [IRC §56(a)(3)]
  • Loss limitations must be recalculated
  • U.S. production activities deduction must be recalculated [IRC §199(d)(6)]
alternative minimum tax2

Alternative Minimum Tax

The ACE Adjustment

adjusted current earnings
Adjusted Current Earnings
  • Adjusted current earnings [IRC §56(g)] AMTI before ACE adjustment+/- Adjustments for computing ACE = Adjusted current earnings (ACE)
adjusted current earnings1
Adjusted 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
adjusted current earnings2
Adjusted 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
ace adjustment
ACE 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)
ace adjustment example 1
ACE Adjustment – Example 1
  • Assume:
    • AMTI before the ACE adjustment = $100,000
    • Adjusted current earnings (ACE) = $130,000
    • No AMT NOL carryforward
  • Then the ACE adjustment = 75% x (130,000 – 100,000) = $22,500
  • So, AMTI = 100,000 + 22,500 = $122,500
ace adjustment1
ACE 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) or
    • The sum of positive ACE adjustments in all prior years over the sum of negative ACE adjustments in all prior years
ace adjustment example 2
ACE Adjustment – Example 2
  • Assume:
    • AMTI before the ACE adjustment = $100,000
    • Adjusted current earnings (ACE) = $80,000
    • Sum of all prior year ACE adj.s = $25,000
    • No AMT NOL carryforward
  • Then the ACE adjustment = 75% x (80,000 – 100,000) = ($15,000)
  • So, AMTI = 100,000 + (15,000) = $85,000
ace adjustment example 3
ACE Adjustment – Example 3
  • Assume:
    • AMTI before the ACE adjustment = $100,000
    • Adjusted current earnings (ACE) = $80,000
    • Sum of all prior year ACE adj.s = $12,000
    • No 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 tax3

Alternative Minimum Tax

AMT NOL Deduction

and

AMT Exemption

amt nol deduction
AMT 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
amt exemption
AMT Exemption
  • Exemption [IRC §55(d)]
    • Exemption amount is $40,000
    • Phase-out of exemption amount: 25% * (AMTI - 150,000)
    • Exemption cannot go below zero! (Fully phased-out at AMTI of $310,000 or more)
amt exemption examples
AMT Exemption – Examples
  • What is the exemption for a corporation with AMTI of $101,500?
    • $40,000, AMTI < $150,000 (no phase-out)
amt exemption examples1
AMT Exemption – Examples
  • What is the exemption for a corporation with AMTI of $193,000?
    • 40,000–25%(193,000–150,000)= $29,250
amt exemption examples2
AMT Exemption – Examples
  • What is the exemption for a corporation with AMTI of $350,000?
    • $0, AMTI > $310,000 (fully phased-out)
amt examples
AMT Examples
  • Examples 4, 5, and 6
  • Problems: C5-36, C5-40, C5-48