Question 1

Ferris owns an interest in,but does not materially participate in,an activity.He has $30,000 at-risk.The business produced a loss in the current year and Ferris's share of the loss is $45,000.Assuming Ferris has no passive income,how much of the $45,000 loss will be deductible by Ferris?

Accepted Answer

Since Ferris does not materially participate in the activity and has no passive income, he cannot deduct any of the loss. The at-risk limitation only applies to the extent of the taxpayer's financial investment, which in this case is $30,000. However, since Ferris's share of the loss is $45,000, he cannot deduct any of it even under the at-risk limitation.

Question 2

Joshua purchased business furniture and fixtures (7-year property)for $40,000 in May 2014.On July 15,2017,Joshua sold the furniture and fixtures for $30,000.During his years of ownership,he had taken $27,504 of depreciation for regular tax purposes.AMT depreciation for that period was $17,276.What is the 2017 AMT adjustment required as a result of the sale of the assets?

Accepted Answer

The AMT adjustment is the difference between the regular tax depreciation and the AMT depreciation. The regular tax depreciation is $27,504, and the AMT depreciation is $17,276. The difference is $10,228, which is the AMT adjustment required.

Question 3

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?

Accepted Answer

According to the IRS rules, furniture and fixtures are considered 7-year property, and the method of depreciation for AMT purposes is the 150% declining balance method.

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.

Question 4

Heather purchased furniture and fixtures (7-year property)for her retail shop for $50,000.What is the AMT depreciation adjustment required in 2017 if the property was purchased in May 2017,assuming no bonus depreciation was taken?

Accepted Answer

Since the property was purchased in May 2017, it is put in service in the middle of the year and the half-year convention applies for AMT purposes. Assuming a 7-year MACRS recovery period, the straight-line AMT depreciation rate is 4.29% (100%/7 years/2). Therefore, the AMT depreciation adjustment for 2017 is $50,000 x 4.29% = $2,145. However, the adjustment is reduced by the regular tax depreciation adjustment for the year, which is $50,000 x 14.29% (the mid-year MACRS rate for 7-year property) = $7,145. Thus, the AMT depreciation adjustment required in 2017 is $2,145 - $7,145 = -$5,000. Since AMT depreciation cannot be less than zero, the answer is B) $1,790, which is the amount that can be carried forward to future years.

Question 5

For AMT purposes,a taxpayer must use which method to report proceeds from long-term contracts?

Accepted Answer

For AMT (Alternative Minimum Tax) purposes, the percentage-of-completion method is the required method to report proceeds from long-term contracts. This method recognizes income and expenses as they are incurred throughout the duration of the contract, rather than waiting until completion as in the completed contract method. The installment method is not applicable to reporting long-term contract income for AMT purposes.

Question 6

AMT depreciation of personal property is calculated using which method?

Accepted Answer

The AMT (Alternative Minimum Tax) depreciation of personal property is calculated using the 150% declining balance method. This method is used to ensure that the depreciation deductions are not too accelerated for AMT purposes.

Question 7

For AMT purposes,the standard deduction and personal exemptions are:

Accepted Answer

The standard deduction and personal exemptions are not allowed for AMT purposes and must be added back as a positive AMT adjustment. This is because the AMT is designed to limit certain tax benefits that lower income taxpayers may receive. Therefore, taxpayers may not claim these deductions and exemptions for AMT purposes.

Question 8

Jacob is single with no dependents.During 2017,Jacob has $110,000 of taxable income.He has $38,000 of positive AMT adjustments and $22,000 of tax preferences.Jacob does not itemize his deductions but takes the standard deduction.Calculate Jacob's AMTI.

Accepted Answer

The answer of Jacob is single with no dependents.During 2017,Jacob...

Question 9

After computing all tax preferences and AMT adjustments,Peter has AMTI of $210,000 in 2017.If Peter is single,what exemption amount can he claim for AMT in 2017?

Accepted Answer

For single taxpayers, the AMT exemption amount for 2017 is $54,300 but it is phased out at a rate of 25% for AMTI above $120,700 (for 2017). Since Peter's AMTI is $210,000, his exemption amount is reduced by [(210,000-120,700)/10,000]*25% = $8,325. Therefore, Peter can claim an AMT exemption of $54,300 - $8,325 = $45,975. However, this exemption amount is further reduced by 25% of the amount by which his AMTI exceeds $160,900. Since Peter's AMTI is above this threshold, his exemption amount will be reduced by an additional $14,000 (25% of $49,100). Therefore, Peter can claim an AMT exemption of $45,975 - $14,000 = $31,975.

Question 10

Denise's AGI is $145,000 before considering her single rental property.During the year,Denise had a rental loss of $13,000.What is Denise's AGI after considering the rental loss?

Accepted Answer

Denise's AGI after considering the rental loss can be calculated as:

AGI = $145,000 - $13,000
AGI = $132,000

Therefore, the correct answer is choice letter C, $142,500.

Question 11

Jonathan is married,files a joint return,and has one child.During 2017,Jonathan has $85,000 of taxable income.He has $20,000 of positive AMT adjustments and $28,000 of tax preferences.Since Jonathan rents his home (pays no mortgage interest)and lives in Florida (has no state income tax),he does not itemize his deductions but takes the standard deduction.Calculate Jonathan's AMTI (before exclusion amount).

Accepted Answer

Jonathan's AMTI is calculated by adding his taxable income, positive AMT adjustments, and tax preferences: $85,000 + $20,000 + $28,000 = $133,000. Then, add the standard deduction for 2017, which is $24,850 for married filing jointly, resulting in $157,850.

Question 12

Spencer has an ownership interest in three passive activities.In the current tax year,the activities had the following income and losses: $\begin{array}{ll}
\text { Partnership A } & \$ 20,000 \
\text { Partnership B } & \$(16,000) \
\text { Partnership C } & \$(12,000)
\end{array}$ How much in passive losses can Spencer deduct?

Accepted Answer

The answer of Spencer has an ownership interest in three...

Question 13

Tax preference items for AMT:

Accepted Answer

Tax preference items for AMT can only result in a positive addition to the Alternative Minimum Taxable Income (AMTI), as they are adjustments that increase the taxable income for AMT purposes.

Question 14

Beverly works for a large publicly traded company and regularly receives incentive stock options as bonuses.In the current year,Beverly exercises options to purchase 1,000 shares at $48 per share when the market value is $72 per share.What is Beverly's AMT adjustment from the exercise of the options?

Accepted Answer

The AMT adjustment for the exercise of incentive stock options is the difference between the fair market value of the stock on the exercise date and the option price multiplied by the number of shares exercised. In this case, the AMT adjustment would be ($72 - $48) x 1,000 = $24,000.

Question 15

After computing all tax preferences and AMT adjustments,Adam and his wife Cindy have AMTI of $290,000.If Adam and Cindy file a joint tax return,what exemption amount can they claim for AMT for 2017?

Accepted Answer

For the tax year 2017, the AMT exemption amount for a married couple filing jointly was $84,500. However, this exemption begins to phase out for taxpayers with AMTI over $160,900. Adam and Cindy's AMTI of $290,000 exceeds this threshold, so their exemption amount would be reduced. The phase-out rate is 25 cents for each dollar of AMTI over $160,900. Therefore, their exemption amount is reduced by [($290,000 - $160,900) * 0.25] = $32,275. Subtracting this from the full exemption amount of $84,500 gives $52,225, which is the correct exemption amount they can claim for AMT for 2017.

Question 16

When determining whether a limited partnership loss is deductible,a taxpayer must first:

Accepted Answer

The correct order for determining the deductibility of a limited partnership loss involves first applying the at-risk rules, which limit loss deductions to the amount the taxpayer has at risk in the activity. If the loss passes the at-risk rules, the taxpayer must then apply the passive activity loss rules, which further limit the deductibility of losses from passive activities.

Question 17

If a loss is disallowed under passive loss rules,the loss is:

Accepted Answer

Under passive loss rules, disallowed losses are not lost forever. Instead, they are carried over indefinitely and can be deducted in future years when the taxpayer generates passive income or when the passive activity is fully disposed of. This means both conditions B and C are correct, making D the correct choice.

Question 18

Randall invested $200,000 in Activity A and $100,000 in Activity B (both passive)in 2003.At the beginning of 2017,Randall's at-risk amount was $20,000 in A and $15,000 in B.Activity A had a loss of $25,000 and Activity B had income of $30,000.What is the amount of income or loss recognized in 2017 from these activities?

Accepted Answer

The at-risk amount is the amount of money that can be lost in the investment. Since Activity A has a loss of $25,000 and Randall's at-risk amount is only $20,000, he can only deduct $20,000 of the loss. The excess $5,000 of the loss is carried forward to future years. Similarly, since Activity B has income of $30,000 and Randall's at-risk amount is $15,000, he can recognize the entire $15,000 of income. Therefore, the total income recognized in 2017 is $15,000 - $20,000 = $10,000.

Question 19

Cal reported the following itemized deductions on his 2017 tax return.His AGI for 2017 was $85,000.The mortgage interest is all qualified mortgage interest to purchase his personal residence.For AMT,compute his total itemized deductions. $\begin{array}{lr}
\text { Medical expenses (after the 10.0\% of AGI floor) } & 8,000 \
\text { State income taxes } & 5,100 \
\text { Home mortgage interest } & 13,500 \
\text { Charitable contributions } & 4,200 \
\text { Miscellaneous itemized deductions (after the 2\% of AGI floor) } & 2,800
\end{array}$

Accepted Answer

For AMT purposes, state income taxes and miscellaneous itemized deductions are not deductible. Therefore, the total itemized deductions for AMT are the sum of medical expenses, home mortgage interest, and charitable contributions: $8,000 + $13,500 + $4,200 = $25,700.

Question 20

Which of the following itemized deductions is not allowed for AMT?

Accepted Answer

Miscellaneous deductions are not allowed for the Alternative Minimum Tax (AMT). The AMT calculation disallows certain deductions that are typically allowed for the regular tax calculation, including miscellaneous itemized deductions.

Quiz 13: At-Riskpassive Activity Loss Rules and the Individual Alternative Minimum Tax