Question 1

If a taxpayer elects to capitalize and to amortize intangible drilling costs over a three-year period for regular income tax purposes, there is no adjustment or preference for AMT purposes.

Accepted Answer

Taxpayers who elect to capitalize and amortize intangible drilling costs over a three-year period for regular income tax purposes must adjust the deduction for AMT purposes. The adjustment is spread over a seven-year period.

Question 2

The recognized gain for regular income tax purposes and the recognized gain for AMT purposes on the sale of stock acquired with an incentive stock option (ISO) are always the same because the adjusted basis is the same.

Accepted Answer

The recognized gain for regular income tax purposes and the recognized gain for AMT purposes on the sale of stock acquired with an ISO can be different because the adjusted basis under AMT rules is different from the adjusted basis under regular income tax rules.

Question 3

Benita expensed mining exploration and development costs of $500,000 incurred in the current tax year.She will be required to make negative AMT adjustments for each of the next 10 years.

Accepted Answer

Mining exploration and development costs are typically considered preference items for Alternative Minimum Tax (AMT) purposes and may require an adjustment in the year they are incurred, not spread over the next 10 years.

Question 4

Interest on a home equity loan that is not used to acquire or improve the taxpayer's principal residence cannot be deducted for AMT purposes.

Accepted Answer

The answer of Interest on a home equity loan that...

Question 5

In 2019, the amount of the deduction for medical expenses for regular tax purposes may be different than for AMT
purposes.

Accepted Answer

The answer of In 2019, the amount of the deduction...

Question 6

Because passive losses are not deductible in computing either taxable income or AMTI, no AMT adjustment for passive losses is required.

Accepted Answer

Passive losses can be deductible under certain conditions for regular tax purposes but may be treated differently for Alternative Minimum Tax (AMT) calculations, potentially requiring adjustments.

Question 7

The standard deduction is allowed for regular income tax purposes but is disallowed for AMT purposes.This results in a positive AMT adjustment.

Accepted Answer

This statement is true. The standard deduction is a common itemized deduction allowed for regular income tax purposes, but it is not allowed for AMT purposes. As a result, taxpayers who claim the standard deduction for regular tax purposes must add back the standard deduction when calculating their AMT liability. This is known as a positive AMT adjustment.

Question 8

Income from some long-term contracts can be reported using the completed contract method for regular income tax purposes, but the percentage of completion method is required for AMT purposes for all long-term contracts.

Accepted Answer

This statement is true. The completed contract method is an acceptable method of accounting for long-term contracts for regular income tax purposes, but the percentage of completion method is required for AMT (Alternative Minimum Tax) purposes. This is because the AMT system aims to eliminate certain tax benefits and encourages the use of more conservative accounting methods to reduce the potential for tax shelters.

Question 9

Kay claimed percentage depletion of $119,000 for the current year for regular income tax purposes.Cost depletion would have been $60,000.Her basis in the property was $90,000 at the beginning of the current year.Kay must treat the percentage depletion deducted in excess of cost depletion, or $59,000, as a preference in computing AMTI.

Accepted Answer

The answer of Kay claimed percentage depletion of $119,000 for...

Question 10

In the current tax year, Ben exercised an incentive stock option (ISO), acquiring stock with a fair market value of
$190,000 for $170,000.As a result, his AMT basis for the stock is $170,000, his regular income tax basis for the stock is $170,000, and his AMT adjustment is $0 ($170,000 - $170,000).

Accepted Answer

When Ben exercises an incentive stock option (ISO) and acquires stock, for AMT purposes, the basis of the stock is the price he paid ($170,000), but the AMT adjustment is the difference between the fair market value of the stock when exercised ($190,000) and the price he paid ($170,000), which is $20,000, not $0. His regular income tax basis for the stock is indeed $170,000, but the AMT adjustment should be $20,000.

Question 11

The sale of business property could result in an AMT adjustment.

Accepted Answer

When a business property is sold at a gain, it could trigger an adjustment under the Alternative Minimum Tax (AMT) rules. This is because the AMT has different rules for calculating taxable income and may disallow certain deductions or exemptions that would otherwise decrease regular tax liability. As a result, the gain on the sale of business property may be subject to AMT, resulting in an additional tax liability.

Question 12

Interest income on private activity bonds issued in 2015 reduced by expenses incurred in carrying the bonds is a preference item that is included in computing AMTI.

Accepted Answer

Interest income on private activity bonds is a preference item that must be added back into the regular taxable income to compute AMTI. Expenses incurred in carrying the bonds can be deducted from the interest income to arrive at the taxable income. However, these expenses do not reduce the interest income for AMTI purposes.

Question 13

The deduction for charitable contributions in calculating the regular income tax can differ from that in calculating the
AMT because the percentage limitations (20%, 30%, 50%, and 60%) may be applied to a different base amount.

Accepted Answer

The answer of The deduction for charitable contributions in calculating...

Question 14

Evan is a contractor who constructs both commercial and residential buildings.Even though some of the contracts could qualify for the use of the completed contract method, Evan decides to use the percentage of the completion method for all of his contracts.This increases his AMT adjustment associated with long-term contracts for the current year.

Accepted Answer

The answer of Evan is a contractor who constructs both...

Question 15

The AMT adjustment for research and experimental expenditures can be avoided if the taxpayer capitalizes the expenditures and amortizes them over a 10-year period for regular tax purposes.

Accepted Answer

This statement is true. By capitalizing and amortizing research and experimental expenditures over a 10-year period for regular tax purposes, the taxpayer can avoid the AMT adjustment for those expenditures.

Question 16

Kerri, who has AGI of $120,000, itemized her deductions in the current year.She paid mortgage interest of $17,000 on her primary residence and $2,400 of interest on a home equity loan.The proceeds of the home equity loan were used to purchase a new minivan for her family.Kerri incurs a positive AMT adjustment of $19,400 in computing AMT.

Accepted Answer

The interest on the home equity loan used to purchase a minivan is not deductible for tax purposes because it was not used to buy, build, or substantially improve the taxpayer's home. Therefore, it would not be included in itemized deductions or affect the AMT adjustment in the manner described.

Question 17

If the regular income tax deduction for medical expenses is $0, under certain circumstances the AMT deduction for medical expenses can be greater than $0.

Accepted Answer

The answer of If the regular income tax deduction for...

Question 18

Nell records a personal casualty loss deduction of $14,500 for regular income tax purposes.The loss was the result of a Federally declared disaster.The actual loss was $26,600, but it was reduced by $100 and by $12,000 (10% ×
$120,000 AGI) for regular tax purposes.For AMT purposes, the casualty loss deduction also is $14,500.

Accepted Answer

For AMT purposes, the casualty loss deduction is not subject to the 10% of AGI limitation, so it remains at $14,500.

Question 19

Cher sold undeveloped land that originally cost $150,000 for $225,000.A positive AMT adjustment of $75,000 is required as a result of the sale.

Accepted Answer

The sale of undeveloped land at a gain does not typically result in an AMT adjustment. The gain is already included in regular taxable income, and there is no separate AMT adjustment required for this type of transaction.

Question 20

Elmer exercises an incentive stock option (ISO) in March for $6,000 (fair market value of the stock on the exercise date is $7,600).If Elmer sells the stock in November of the same tax year for $8,000, he reports a $1,600 AMT adjustment for the year.

Accepted Answer

The AMT adjustment would be $1,600 if Elmer were holding onto the stock, but since he sells the stock in the same tax year as he exercised the option, the entire gain from the exercise price to the sale price ($8,000 - $6,000 = $2,000) is reported as ordinary income, not as an AMT adjustment.

Quiz 12: Alternative Minimum Tax