Asked by Terry Valentine on Jun 25, 2024
Verified
Catherine purchased furniture and fixtures (7-year property) for her shop for $80,000 in May.What AMT depreciation adjustment is required for the year?
A) $0.
B) $2,864.
C) $8,568.
D) $11,432.
AMT Depreciation Adjustment
Adjustments for depreciation that are required when calculating the Alternative Minimum Tax, a parallel tax system designed to ensure that certain taxpayers pay a minimum amount of tax.
7-year Property
Refers to assets that have a recovery period of 7 years under the Modified Accelerated Cost Recovery System for depreciation.
AMT Purposes
AMT purposes relate to the calculation for the Alternative Minimum Tax, a supplemental income tax required in addition to baseline income tax for certain individuals, corporations, estates, and trusts.
- Comprehend the impact that modifying depreciation has on ordinary tax liabilities as well as the Alternative Minimum Tax.
Verified Answer
The calculation can be done as follows:
Year 1:
Depreciation rate = (1.5 / 7) = 21.43%
Depreciation for year = $80,000 x 21.43% = $17,144
The AMT adjustment is the difference between the regular tax depreciation and the AMT depreciation:
Regular tax depreciation = $80,000 / 7 = $11,429
AMT depreciation = $17,144
AMT adjustment = AMT depreciation - regular tax depreciation
= $17,144 - $11,429
= $5,715
However, for the first year of placing the property in service, the AMT adjustment is limited to the excess of the regular tax depreciation over the straight-line depreciation.
Therefore, the AMT adjustment required for the year is:
= $11,429 - ($80,000 ÷ 7 ÷ 2)
= $11,429 - $8,565
= $2,864
Hence, the correct answer is B.
Learning Objectives
- Comprehend the impact that modifying depreciation has on ordinary tax liabilities as well as the Alternative Minimum Tax.
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