Alternative Minimum Tax Planning Ideas - Depreciation

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Alternative Minimum Tax Planning Ideas - Depreciation

Surprisingly, one of every six individuals paying the Alternative Minimum Tax has depreciation as an Amt item. It may or may not individually be a large item to a single taxpayer, but the good news is that it is easy to plan around, and this planning can be done any time up until the filing of the tax return. In other words, a taxpayer with this item still may have the occasion to sacrifice his Amt for 2009.

Alternative Minimum Tax Planning Ideas - Depreciation

There are numerous ways depreciation may show up in an private taxpayer's Form 1040. One is rental asset the private owns; someone else is firm asset if the firm is being operated as a sole proprietorship. Other ways are if the firm or rental asset is in a "pass-through" entity. Examples of these consist of Llcs, partnerships, and S corporations, in which case the revenue and expenses, and any of the detach Amt items, are reported on the private owners' tax returns.

Here's how depreciation works. Assume a firm asset cost ,000, and that the period over which it will be used (its "useful life") is 5 years. Under the basic "straight-line" formula of depreciation, the taxpayer would article an price of ,000 per year over this period.

But, in an effort to encourage investment, Congress allows a selection of other depreciation methods, all of which allow more of the price to be deducted in the early years of the property's life. For example, under something called the "double declining balance" method, here is how the cost would be recovered:

Year 1 - 40%, or ,000
Year 2 - 24%, or ,400
Year 3 - 14%, or ,400
Year 4 - 11%, or ,100
Year 5 - 11%, or ,100

Total - ,000

While the duplicate declining balance formula may be used for regular Tax purposes, it is not allowed for purposes of the Alternative Minimum Tax. The most accelerated depreciation formula that may be used for a taxpayer's Amt calculation in this example, the so-called "150% declining balance" method, would succeed in depreciation deductions as follows:

Year 1 - 30%, or ,000
Year 2 - 21%, or ,100
Year 3 - 17%, or ,700
Year 4 - 16%, or ,600
Year 5 - 16%, or ,600

Total - ,000

Matching these two schedules, the Amt item in each of the 5 years is the disagreement between the two:

Year 1 - ,000 Amt item (Amt revenue is higher than regular Tax income)
Year 2 - 0 Amt item "
Year 3 - (0) Amt item (Amt revenue is lower than regular Tax income)
Year 4 - (0) Amt item "
Year 5 - (0) Amt item "

Total -

The planning occasion here simply is to choose a depreciation formula that does not succeed in an Amt item. For regular Tax purposes, a taxpayer may choose to use the 150% declining balance formula (the Amt method) or the straight-line formula instead of the duplicate declining balance method. By doing this, there will be no Amt item to report. Note that this choosing is available each year for asset that is settled in assistance during that year. Note also, however, that the selection of formula is made at the entity level, so if the asset is in an Llc, partnership or S corporation, the choosing is made in the filing of that entity's tax return.

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