DISCUSSION QUESTIONS

C: 5-1

Explain Congress’ intent for enacting the AMT.

C: 5-2

Define the following terms relating to the AMT:

• Tax preference item
• AMT adjustment item
• Adjusted current earnings
• Alternative minimum taxable income
• AMT exemption amount
• Tentative minimum tax
• Minimum tax credit

C: 5-3

Dunn Corporation is not a small corporation exempt from the AMT. Dunn’s CPA does not calculate the AMT because he knows that Dunn’s taxable income is less than the $40,000 AMT exemption amount allowed to corporations. Is the CPA correct in his belief? Explain.

C: 5-4

What special rules (if any) apply to the AMT calculation for the following entities:

• Corporations, particularly small ones
• Controlled groups
• S corporations

C: 5-5

Agnew Corporation operates a small manufacturing business. During Year 1 (its first tax year, which is 12 months long), Agnew sells goods for $3.8 million for which the cost of goods sold is $2.8 million. Agnew’s owner estimates that future sales and cost of goods sold will grow by 25% each year. Agnew is not related to any other corporations. Is Agnew exempt from the AMT in Year 1? In any of the next five years? Explain.

C: 5-6

Menifee Corporation has conducted business for several years, and its annual gross receipts never have been more than $4 million. Jackie, who has owned all of Menifee’s stock since she incorporated it, purchases all of Estill Corporation’s stock in the current year. Estill’s annual gross receipts have been approximately $6 million in recent years. Explain to Jackie how her acquisition of Estill’s stock will affect the AMT that Menifee pays.

C: 5-7

Determine whether the following statements relating to the AMT for a corporation are true or false. If false, explain why.

• Tax preference items only increase AMTI.
• A corporation uses the same NOL carryover amount for regular tax and AMT purposes.
• A corporation is allowed a tax credit for the excess of its AMT over its regular tax.
• The general business credit can reduce a corporation’s regular tax and also its AMT.
• The ACE adjustment only increases AMTI.
• An S corporation is exempt from the AMT, regardless of its gross receipts.

C: 5-8

Identify each of the following as a tax preference item (PREF), an AMT adjustment item to calculate preadjustment AMTI (ADJ), an item to adjust from preadjustment AMTI to ACE (ACE), or none of these (NONE):

• Percentage depletion in excess of a property’s adjusted basis at the beginning of the tax year
• MACRS depreciation deducted on a machine placed in service in the current year
• Sec. 179 expense deducted on delivery trucks placed in service in the current year
• Gain or loss realized on the sale of a machine placed in service four years ago
• Tax-exempt interest earned on State of Michigan private activity bonds
• Tax-exempt interest earned on State of Michigan general revenue bonds
• Long-term contract for which the taxpayer uses the completed contract method

C: 5-9

What adjustment does a corporation make if ACE is more than preadjustment AMTI? If ACE is less than preadjustment AMTI?

C: 5-10

Florida Corporation incurs AMT for the first time in the current year. The main reason for incurring the AMT is a $2 million gain on a current year installment sale that Florida is recognizing over ten years for regular tax purposes. Explain to Florida’s president how the installment sale can cause Florida to incur the AMT, how its treatment for ACE is similar to and different from the E&P treatment with which she is familiar, and whether its ACE treatment will partially or completely reverse in future years.