Chapter 12, Problem 33P

a.

To determine

Determine the AMT adjustment for the year 1998 of F Acres.

Explanation of Solution

Alternative Minimum Tax (AMT): AMT is a tax system imposed by congress to collect a minimum amount of income tax for each year from the taxpayers who generated the income more than modest economics income. The AMT uses economic income as the tax base rather than the regular income tax base.

Determine the AMT adjustment for the year 1998 of F Acres.

Step 1: Determine the value of personal real property.

Asset	Amount ($)
Total value of the apartment	300,000
Less: Land	(90,000)
Depreciable Basis of the Apartment	210,000

Step 2: Compute the MACRS deduction for regular income tax.

The apartment purchased by L on February 21, 1998. Hence, according to the MACRS table (in chapter 8), the rate for year 1(1998) is 3.182%.

$\begin{array}{c}\begin{array}{l}\text{MACRS Deduction for}\\ \text{Regular Income Tax Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 3.182\text{\%}\\ =\text{\$6,682}\end{array}$

Step 3: Compute the depreciation deduction for AMT purposes.

According to ADS straight-line table, the rate for year 1(1998) is 2.188%.

$\begin{array}{c}\begin{array}{l}\text{Depreciation Deduction for }\\ \text{AMT Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 2.188\text{\%}\\ =\text{\$4,595}\end{array}$

Step 4: Determine the AMT adjustment for the year 1998(First Year) of F Acres.

$\begin{array}{c}\text{AMT Adjustment}=\left[\begin{array}{l}\left(\begin{array}{l}\text{MACRS Deduction for}\\ \text{Regular Income Tax Purposes}\end{array}\right)\\ -\left(\begin{array}{l}\text{Depreciation Deduction for}\\ \text{AMT Purposes}\end{array}\right)\end{array}\right]\\ =\$6,682-\$4,595\\ =\$2,087\left(\text{Positive}\right)\end{array}$

Hence, the AMT adjustment for 1998 shows a positive amount of $2,087.

b.

To determine

Determine the AMT adjustment for the year 2019 of F Acres and S One Apartment.

Explanation of Solution

Determine the AMT adjustment for the year 2019 of F Acres.

Step 1: Compute the MACRS deduction for regular income tax.

According to the MACRS table, the rate for 2019 is 3.637%.

$\begin{array}{c}\begin{array}{l}\text{MACRS Deduction for }\\ \text{Regular Income Tax Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 3.637\text{\%}\\ =\text{\$7,638}\end{array}$

Step 2: Compute the depreciation deduction for AMT purposes.

According to ADS straight-line table, the rate for 2019 is 2.500%

$\begin{array}{c}\begin{array}{l}\text{Depreciation Deduction for }\\ \text{AMT Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 2.500\text{\%}\\ =\text{\$5,250}\end{array}$

Step 3: Determine the AMT adjustment for 2019 of F Acres.

$\begin{array}{c}\text{AMT Adjustment}=\left[\begin{array}{l}\left(\begin{array}{l}\text{MACRS Deduction for }\\ \text{Regular Income Tax Purposes}\end{array}\right)\\ -\left(\begin{array}{l}\text{Depreciation Deduction for }\\ \text{AMT Purposes}\end{array}\right)\end{array}\right]\\ =\$7,638-\$5,250\\ =\$2,388\left(\text{Positive}\right)\end{array}$

Therefore, the AMT adjustment for 2019 shows a positive amount of $2,388.

Determine the AMT adjustment for the year 2019 of S One Apartment.

Step 1: Compute the MACRS deduction for regular income tax.

According to the MACRS table, the rate for 2019 is 0.455%.

$\begin{array}{c}\begin{array}{l}\text{MACRS Deduction for }\\ \text{Regular Income Tax Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 0.455\text{\%}\\ =\text{\$3,185}\end{array}$

Step 2: Compute the depreciation deduction for AMT purposes.

$\begin{array}{c}\begin{array}{l}\text{MACRS Deduction for }\\ \text{Regular Income Tax Purposes}\end{array}]=\text{Depreciable Basis Amount}\times \text{Rate}\\ =\text{\$210,000}\times 0.455\text{\%}\\ =\text{\$3,185}\end{array}$

Step 3: Determine the AMT adjustment for the year 2019.

$\begin{array}{c}\text{AMT Adjustment}=\left[\begin{array}{l}\left(\begin{array}{l}\text{MACRS Deduction for}\\ \text{Regular Income Tax Purposes}\end{array}\right)\\ -\left(\begin{array}{l}\text{Depreciation Deduction for }\\ \text{AMT Purposes}\end{array}\right)\end{array}\right]\\ =\$3,185-\$3,185\\ =\$0\end{array}$

Therefore, the AMT adjustment for 2019 of S One Apartment is $0.