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It is certainly an understatement to define this adjustment only as complex. With a simple pattern of facts, the authors describe and illustrate the depreciation convolutions to which a corporate taxpayer may be exposed. The resulting narrative requires careful attention. Depreciation recordkeeping requirements may well defeat the purposes of the ACE legislation. The ACE adjustment may now be simpler than that enacted in 1986, but simplification surely is a misnomer!
Congress modified the corporate alternative minimum tax (AMT) in TRA 86 to ensure that certain taxpayers with substantial economic income could not avoid significant tax liability by using exclusions, deductions, and credits. The corporate AMT applies to all corporations other than S corporations, regulated investment corporations (RICs), real estate investment trusts (REITs) and real estate mortgage investment conduits (REMICs).
In computing alternative minimum taxable income (AMTI) for tax years beginning after 1986 and prior to 1990, one-half of the amount by which the corporation's pre-tax book income exceeded AMTI, determined without regard to the "book income adjustment" and any NOLs, was added to the otherwise computed AMTI. TRA 86 provided that for tax years beginning after 1989, the corporate book income adjustment would be replaced with an adjustment based on adjusted current earnings (ACE). Hence, most corporate taxpayers must compute ACE for tax years beginning after 1989. In general, AMTI is increased by 75% of the amount by which ACE exceeds AMTI, determined without regard to the ACE adjustment and any NOLs.
The Revenue Reconciliation Act of 1989 (RRA 89) subsequently made a number of significant changes to corporate AMT. One purpose of RRA 89 modifications was to "simplify the ACE computation." This article examines the changes in the computation of ACE depreciation and provides examples of required computations. It also deals with portions of the proposed regulations under Sec. 56 issued in May 1990. The computations presented in this article suggest that ACE depreciation adjustments may be larger than many taxpayers have anticipated. Indeed, the magnitude of the adjustment for five-year ACRS property in the last year of its regular tax depreciation life can be staggering (see Example 3). The ACE depreciation adjustments may generate unexpected AMT liabilities, and corporate taxpayers are well advised to review their estimated tax payments to avoid significant interest...