Question 1

Celia and Christian, who are married filing jointly, have one dependent and do not itemize deductions. They have taxable income of $82,000 and tax preferences of $53,000 in 2014. What is their AMT base for 2014?
A) $0.
B) $77,838.
C) $94,450.
D) $150,250.
E) None of the above.

Accepted Answer

AMT base is taxable income plus tax preferences. So, Celia and Christian's AMT base is $82,000 + $53,000 = $135,000. However, the AMT base is phased out for taxpayers with high incomes. For 2014, the phase-out begins at $150,000 for married couples filing jointly. So, Celia and Christian's AMT base is reduced by $15,550, which is the amount by which their AMT base exceeds $150,000. This leaves them with an AMT base of $135,000 - $15,550 = $119,450. However, the AMT base cannot be less than zero. So, Celia and Christian's AMT base is $0.

Question 2

Wallace owns a construction company that builds both commercial and residential buildings. He contracts to build a residential building for $800,000 for which he is eligible to use the completed contract method of accounting. In the current year for regular income tax purposes, Wallace does not recognize any income on the contract. Under the percentage of completion method, the income recognized under the contract would have been $60,000. Wallace's AMT adjustment is:
A) $0.
B) $60,000 negative adjustment.
C) $60,000 positive adjustment.
D) $800,000 positive adjustment.
E) None of the above.

Accepted Answer

The AMT adjustment under the completed contract method is the difference between the income recognized under the percentage of completion method and the income recognized under the method used for regular income tax purposes. In this case, the income recognized under the completed contract method is $60,000, which is higher than the income recognized under the regular income tax method (which is $0). Therefore, the AMT adjustment is a positive adjustment of $60,000.

Question 3

Dale owns and operates Dale's Emporium as a sole proprietorship. On January 30, 1998, Dale's Emporium acquired a warehouse for $100,000. For regular income tax purposes in 2014, depreciation was deducted under MACRS using a rate of 2.564%. Determine the AMT adjustment for depreciation and indicate whether it is positive or negative.
A) $64 negative adjustment.
B) $64 positive adjustment.
C) No adjustment is required because Dale's Emporium used the Alternative Depreciation System (ADS) to compute depreciation on the property for AMT purposes.
D) No adjustment is required because Dale's Emporium used MACRS to compute the depreciation of the property for regular income tax purposes.
E) None of the above.

Accepted Answer

The answer of Dale owns and operates Dale's Emporium as...

Question 4

Which of the following statements is correct?
A) The deduction for personal and dependency exemptions is not permitted in calculating the AMT. Therefore, in converting regular taxable income to AMTI, a positive adjustment is required.
B) To the extent that itemized deductions exceed the standard deduction for regular income tax purposes, a positive AMT adjustment is required in converting regular taxable income to AMTI.
C) The charitable contribution deduction for AMT purposes and for regular income tax purposes can be different. If this occurs, a positive AMT adjustment is required for the amount of the difference.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Accepted Answer

The answer of Which of the following statements is correct?
A)...

Question 5

Vinny's AGI is $250,000. He contributed $200,000 in cash to the Boy Scouts, a public charity. What is Vinny's charitable contribution deduction for AMT purposes?
A) $0.
B) $50,000.
C) $75,000.
D) $125,000.
E) None of the above.

Accepted Answer

The answer of Vinny's AGI is $250,000. He contributed $200,000...

Question 6

Eula owns a mineral property that had a basis of $23,000 at the beginning of the year. Cost depletion is $19,000. The property qualifies for a 15% depletion rate. Gross income from the property was $200,000 and net income before the percentage depletion deduction was $50,000. What is Eula's tax preference for excess depletion?
A) $15,000.
B) $23,000.
C) $25,000.
D) $0.
E) None of the above.

Accepted Answer

The answer of Eula owns a mineral property that had...

Question 7

Akeem, who does not itemize, incurred a net operating loss (NOL) of $50,000 in 2013. His deductions in 2013 included AMT tax preference items of $20,000, and he had no AMT adjustments. Assuming the NOL is not carried back, what is Akeem's ATNOLD carryover to 2014?
A) $50,000.
B) $30,000.
C) $20,000.
D) $40,000.
E) None of the above.

Accepted Answer

The ATNOLD (Alternative Tax Net Operating Loss Deduction) carryover is calculated by reducing the NOL by the AMT tax preference items. Therefore, $50,000 NOL - $20,000 AMT tax preference items = $30,000 ATNOLD carryover to 2014.

Question 8

Sand Corporation, a calendar year taxpayer, has alternative minimum taxable income [before adjustment for adjusted current earnings (ACE)] of $900,000 for 2014. If Sand's (ACE) is $975,000, its tentative minimum tax for 2014 is:
A) $0.
B) $56,250.
C) $180,000.
D) $191,250.
E) None of the above.

Accepted Answer

The tentative minimum tax is calculated by taking 20% of the alternative minimum taxable income (AMTI) after the ACE adjustment. The ACE adjustment is the excess of ACE over AMTI, which is $75,000 ($975,000 - $900,000). The AMTI after the ACE adjustment is $975,000. Therefore, the tentative minimum tax is 20% of $975,000, which is $195,000. However, the question asks for the tentative minimum tax before any credits, so the correct answer is $191,250, which is 20% of $900,000.

Question 9

Omar acquires used 7-year personal property for $100,000 to use in his business in February 2014. Omar does not elect § 179 expensing, but does take the maximum regular cost recovery deduction. He elects not to take additional first-year depreciation. As a result, Omar will have a positive AMT adjustment in 2014 of what amount?
A) $0.
B) $3,580.
C) $10,710.
D) $14,290.
E) None of the above.

Accepted Answer

The regular cost recovery deduction for personal property is calculated using the MACRS depreciation method over 5 years. Therefore, the regular cost recovery deduction for Omar's used 7-year personal property would be $20,000 annually ($100,000/5 years). Since Omar took the maximum regular cost recovery deduction, his deduction for 2014 would be $20,000.

To calculate the AMT adjustment, we need to use the straight-line depreciation method over 7 years, which results in a depreciation deduction of $14,285. However, since Omar did not elect §179 expensing, he will have a positive AMT adjustment equal to the difference between the straight-line depreciation and the regular cost recovery deduction, which is $20,000 - $14,285 = $5,715.

Therefore, Omar will have a positive AMT adjustment of $5,715 in 2014, and the correct answer is B.

Question 10

Which of the following normally produces positive AMT adjustments?
A) Real property taxes deduction.
B) Personal exemption deduction.
C) Charitable contribution deduction.
D) Only a. and b. are correct.
E) a., b., and c. are correct.

Accepted Answer

Real property taxes deduction and personal exemption deduction are both commonly known to produce positive AMT adjustments. Charitable contribution deduction, on the other hand, may or may not lead to AMT adjustments depending on various other factors. Therefore, option D is the correct choice.

Question 11

In 2014, Glenn had a $108,000 loss on a passive activity. None of the loss is attributable to AMT adjustments or preferences. She has no other passive activities. Which of the following statements is correct?
A) In 2014, Glenn can deduct $108,000 for regular income tax purposes and for AMT purposes.
B) Glenn will have a $108,000 tax preference in 2014 as a result of the passive activity.
C) For regular income tax purposes, none of the loss is allowed in 2014.
D) In 2014, Glenn will have a positive adjustment of $25,000 as a result of the passive loss.
E) None of the above.

Accepted Answer

Passive activity losses can only be offset against passive activity income or carried forward to future years when there is passive activity income. Therefore, for regular income tax purposes, none of the loss is allowed in 2014.

Question 12

Which of the following can produce an AMT preference rather than an AMT adjustment?
A) Interest on private activity bonds issued in 2013.
B) Percentage depletion.
C) Incentive stock options (ISOs).
D) Only a. and b.
E) a., b., and c.

Accepted Answer

The answer of Which of the following can produce an...

Question 13

Prior to the effect of tax credits, Eunice's regular income tax liability is $325,000 and her tentative AMT is $312,000. Eunice has general business credits available of $20,000. Calculate Eunice's tax liability after tax credits.
A) $0.
B) $305,000.
C) $312,000.
D) $325,000.
E) None of the above.

Accepted Answer

The answer of Prior to the effect of tax credits,...

Question 14

Kay, who is single, had taxable income of $0 in 2014. She has positive timing adjustments of $206,300 and exclusion items of $100,000 for the year. What is the amount of her alternative minimum tax credit for carryover to 2015?
A) $80,560.
B) $68,861.
C) $68,288.
D) $12,272.
E) None of the above.

Accepted Answer

The answer of Kay, who is single, had taxable income...

Question 15

In 2005, Collies exercised an incentive stock option (ISO), acquiring 150 shares of stock at an option price of $75 per share (fair market value at the date of exercise was $130 per share). In 2014, the rights in the stock become freely transferable (fair market value is still $130 per share). Which of the following statements is incorrect?
A) Collis has no AMT adjustment from the ISO in 2011.
B) Collis has no taxable income from the ISO in 2011.
C) Collis has an AMT basis of $19,500 in the stock.
D) Collis has an income tax basis of $11,250 in the stock.
E) All of the above are correct.

Accepted Answer

All of the statements are correct. 
A) Since the fair market value of the stock on the exercise date was less than the option price, there is no AMT adjustment required in 2011. 
B) There is no taxable income for Collis unless the stock is sold or exchanged. 
C) The AMT basis in the stock is the option price of $75 per share multiplied by the number of shares acquired, which equals $11,250. Since the stock was worth $130 per share at exercise, there is an $18,750 AMT preference item as well. 
D) The income tax basis in the stock is the fair market value on the date of exercise, which is $130 per share. 
Therefore, all of the statements provided are correct.

Question 16

Marvin, the vice president of Lavender, Inc., exercises stock options for 100 shares of stock in March 2014. The stock options are incentive stock options (ISOs). Their exercise price is $20 and the fair market value on the date of exercise is $28. The options were granted in March 2010 and all restrictions on the free transferability had lapsed by the exercise date.
A) If Marvin sells the stock in December 2014 for $3,000, his AMT adjustment in 2014 is a positive adjustment of $800.
B) If Marvin sells the stock in December 2015 for $3,000, his AMT adjustment in 2015 is $0.
C) If Marvin sells the stock in December 2014 for $3,000, his AMT adjustment in 2014 is a negative adjustment of $800.
D) If Marvin sells the stock in December 2015 for $3,000, his AMT adjustment in 2015 is a negative adjustment of $1,000.
E) None of the above.

Accepted Answer

The answer of Marvin, the vice president of Lavender, Inc.,...

Question 17

Which of the following itemized deductions definitely will be the same amount for the regular income tax and the AMT and thus result in no AMT adjustment in 2014?
A) Real property taxes.
B) Casualty losses.
C) Charitable contributions.
D) Only b. and c.
E) a., b., and c.

Accepted Answer

Casualty losses and charitable contributions are deductible under both the regular tax system and the AMT without any adjustments, unlike real property taxes which are not deductible for AMT purposes.

Question 18

Factors that can cause the adjusted basis for AMT purposes to be different from the adjusted basis for regular income tax purposes include the following:
A) A different amount of depreciation (cost recovery) has been deducted for AMT purposes and regular income tax purposes.
B) The spread on an incentive stock option (ISO) is recognized for AMT purposes, but is not recognized for regular income tax purposes.
C) A different amount has been deducted for circulation expenditures for AMT purposes and for regular income tax purposes.
D) Only a. and b.
E) a., b., and c.

Accepted Answer

All three factors listed in options A, B, and C can cause the adjusted basis for AMT purposes to be different from the adjusted basis for regular income tax purposes. Depreciation (cost recovery) deduction is allowed under the regular income tax, but under AMT, it may be limited or entirely disallowed. The spread on an incentive stock option is not recognized for regular income tax purposes, but it is taxed under AMT. Circulation expenditures are fully deductible for regular income tax purposes, but for AMT, only a portion of it may be deductible. Therefore, all three factors contribute to a difference in adjusted basis between AMT and regular income tax purposes.

Question 19

Ted, who is single, owns a personal residence in the city. He also owns a condo near the ocean. He uses the condo as a vacation home. In March 2014, he borrowed $50,000 on a home equity loan and used the proceeds to acquire a luxury automobile. During 2014, he paid the following amounts of interest:

$\begin{array}{llr}
  \text {-on his personal residence  } &\$15,500\
 \text { -on the condo } &6,200\
 \text { -on the home equity loan } &4,800\
 \text {-on credit card obligations  } &1,700\
\end{array}$

What amount, if any, must Ted recognize as an AMT adjustment in 2014?
A) $0.
B) $4,800.
C) $6,200.
D) $11,000.
E) None of the above.

Accepted Answer

The interest on the home equity loan is not deductible for regular tax purposes because the proceeds were not used to buy, build, or improve the personal residence. However, the interest is still deductible for AMT purposes. Therefore, the AMT adjustment for the home equity loan interest is $4,800 ($50,000 x 9.6%). The interest on the mortgage for the personal residence and the condo is deductible for both regular tax and AMT purposes. The interest on the car loan is not deductible for either regular tax or AMT purposes.

Question 20

In 2014, Blake incurs $270,000 of mining exploration expenditures, and deducts the entire amount for regular income tax purposes. Which of the following statements is correct?
A) For AMT purposes, Blake will have a positive adjustment of $243,000 in 2014.
B) Blake will have a negative AMT adjustment of $27,000 in 2019.
C) Over a 10-year period, positive and negative adjustments will net to zero.
D) Only a. and c. are correct.
E) a., b., and c. are correct.

Accepted Answer

For AMT purposes, the entire $270,000 deduction is not allowed in the year incurred, resulting in a positive adjustment of $243,000 in 2014. The remaining $27,000 is deductible over 10 years, leading to a negative adjustment of $27,000 in 2019. Over time, these adjustments net to zero.

Quiz 15: Alternative Minimum Tax

Celia and Christian, who are married filing jointly, have one dependent and do not itemize deductions. They have taxable income of $82,000 and tax preferences of $53,000 in 2014. What is their AMT base for 2014?

Which of the following statements is correct?

Vinny's AGI is $250,000. He contributed $200,000 in cash to the Boy Scouts, a public charity. What is Vinny's charitable contribution deduction for AMT purposes?

Akeem, who does not itemize, incurred a net operating loss (NOL) of $50,000 in 2013. His deductions in 2013 included AMT tax preference items of $20,000, and he had no AMT adjustments. Assuming the NOL is not carried back, what is Akeem's ATNOLD carryover to 2014?

Sand Corporation, a calendar year taxpayer, has alternative minimum taxable income [before adjustment for adjusted current earnings (ACE) ] of $900,000 for 2014. If Sand's (ACE) is $975,000, its tentative minimum tax for 2014 is:

Which of the following normally produces positive AMT adjustments?

In 2014, Glenn had a $108,000 loss on a passive activity. None of the loss is attributable to AMT adjustments or preferences. She has no other passive activities. Which of the following statements is correct?

Which of the following can produce an AMT preference rather than an AMT adjustment?

Prior to the effect of tax credits, Eunice's regular income tax liability is $325,000 and her tentative AMT is $312,000. Eunice has general business credits available of $20,000. Calculate Eunice's tax liability after tax credits.

Kay, who is single, had taxable income of $0 in 2014. She has positive timing adjustments of $206,300 and exclusion items of $100,000 for the year. What is the amount of her alternative minimum tax credit for carryover to 2015?

Which of the following itemized deductions definitely will be the same amount for the regular income tax and the AMT and thus result in no AMT adjustment in 2014?

Factors that can cause the adjusted basis for AMT purposes to be different from the adjusted basis for regular income tax purposes include the following:

In 2014, Blake incurs $270,000 of mining exploration expenditures, and deducts the entire amount for regular income tax purposes. Which of the following statements is correct?