Opportunity to minimize the effect of the corporate AMT.

• Author: Foglis, Thomas A.
• Position: Alternative minimum tax

For many corporate taxpayers, the calculation of the depreciation adjustment of the alternative minimum tax (AMT) and the resulting tax cost is a significant burden. Taxpayers currently have to compute two depreciation adjustments to arrive at alternative minimum taxable income. These include both the AMT and adjusted current earnings (ACE) adjustments. Further, as Congress pursues new sources of tax revenue, there is an increased possibility that the current corporate AMT tax rate of 20% will be increased. The effect of an increase to current as well as potential AMT taxpayers could be costly. For these reasons all taxpayers should evaluate their tax situations and look for opportunities to minimize their AMT or ACE depreciation adjustments.

One specific opportunity may be for taxpayers to elect out of the modified accelerated cost recovery system (MACRS) method of calculating depreciation and still retain an accelerated depreciation deduction without the harsh consequences of an AMT or ACE adjustment.

Sec. 168(f)(1) provides that the MACRS provisions of Sec. 168 do not apply to any property if the taxpayer elects to exclude the property. This rule was first introduced as part of the accelerated cost recovery system (ACRS) legislation of 1981. The original purpose of Sec. 168(f)(1) was relief from the required recovery periods of ACRS depreciation so that, in appropriate situations, taxpayers could elect a depreciation method not expressed in terms of years. For example, video arcade games were in the five-year ACRS recovery class, even though the useful life was probably closer to 24 months (or less). For this reason, many taxpayers sought to use the income forecast method to measure depreciation in accordance with the income produced by the asset, even though the method was not common at that time. The application of this provision became much more significant with the introduction of MACRS and the related AMT or ACE adjustments.

Property may be excluded from the MACRS rules if it can be depreciated under the unit of production method or any other method not expressed in terms of years. In addition, the method should be recognized as an industry practice, the annual usage must be maintained and the useful life (in production terms) must be estimated with some degree of accuracy. Prop. Regs. Sec. 1.168-4(b) states further that this election is to be made in the first tax year that a depreciation deduction would be available to a taxpayer...