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Common preferences include the following.Portion of depreciation on real property placed in service before 1987. Certain tax-exempt interest on state and local bonds issued in years other than 2009 and 2010. Percentage depletion claimed in excess of the adjusted basis of property. For integrated oil companies, excess of intangible drilling costs. Computing Alternative Minimum Taxable Income21. Modifications required to compute AMTI are set forth in Concept Summary 3.1 in the text. Text Example 29 provides demonstration of AMT computation. Adjusted Current Earnings (ACE)22. Purpose of the ACE adjustment is to ensure that the mismatching of financial statement income and taxable income will not produce inequitable results.a. AMTI is increased by 75% of the excess of ACE over adjusted AMTI, or reduced by 75% of the excess of unadjusted AMTI over ACE. The negative adjustment is limited to the aggregate of the positive adjustments under ACE for prior years reduced by any previously claimed negative adjustments.b. ACE should not be confused with current E & P. Many items are similarly treated but certain items deductible in computing E & P are not deductible for AMT. c. Starting point for computing ACE is AMTI and adjusted for the following items. Income permanently excluded from regular taxable income or AMTI. Depreciation on certain property placed in service before 1994. Lessee improvements. LIFO recapture adjustments. Other adjustments and disallowed items such as 70% dividends received deduction.
d. Text Figure 3.3 is reproduced at end of this outline on page 3-12. This figure shows the calculation of this three-tier tax system.Concept Summary 3.2 in text lists impact of various transactions on ACE. 23. Exemption amount is $40,000 and is phased-out by 25% of the amount that AMTI exceeds $150,000. For corporations, phase-out is complete once AMTI reaches $310,000. 24. AMT is a separate tax system and is computed in addition to the regular tax. AMT credit is available to eliminate the possibility of double taxation due to time differences. 25. AMT is subject to estimated tax rules, the only credits available to offset AMT are the foreign tax credit (FTC), and AMT is computed on Form 4626. 3.3 PENALTY TAXES ON CORPORATE ACCUMULATIONS 26. For years before 2013.a. A 15% penalty tax is imposed on earnings retained by corporations for the purpose of avoiding the tax on dividends that would be imposed if distributions were made to the shareholders. b. The penalty taxes that may be imposed are the § 531, accumulated earnings tax (AET) or the § 541, personal holding company tax (PHC tax). c. Beginning in 2013, dividends may be taxed at the highest individual rate (35%), which increased the motivation to accumulate earnings.Accumulated Earnings Tax (§§ 531–537)