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“Let s go ahead and look at this example. In this example is for commercial commercial property. Okay. Let s assume let s start with the example assume that alex a warehouse for three hundred and ten thousand august 1998.
So first we re gonna compute the depreciation under the regular and the depreciation for amt okay for for the regular depreciation. We re gonna take three hundred and ten thousand times two point five six four. I hope you know how to compute depreciation regular depreciation. If not that s something you should have have learned now for amt you re going to take three hundred and ten thousand times amt depreciation rate is two point five percent so notice when we book the appreciation for regular taxes using makers hopefully you know how to use makers if you re looking at the empty.
You know how you should know how to use makers for the amt purposes. The rate is two point five. So there s a difference. There is a positive adjustment of 195.
Okay. There s there s a positive adjustments of 195. Now. This is the alternative depreciation system so basically we re looking at between year two and year forty the rate is two point five.
Okay this is what the 25. Came from this is the 80s scheduled just in case. You re wondering because you should know were makers coming from if you know where this two point five six four came from it s from another schedule. So notice the difference is not minor.
Why the difference is not minor. I ll tell you why because for makers for makers. We depreciate commercial property for thirty nine years for amt..
We depreciate this property for forty years. So the difference is only one year so it s not not a large amount. But nevertheless as an adjustment now let s look at residential apartment building. What do we know about residential apartment building under makers hopefully you remember we depreciate those over twenty twenty seven point five years now for amt.
What do we use for those type of property forty years so let s see how it works same example. Except that this is a residential property for for makers. We re gonna take three hundred and ten thousand times three point six three seven that s from the tape maker stable the depreciation. The regular depreciation is eleven thousand 275.
Now let s look at the depreciation for amt the depreciation for amt. We re going to extend the life so the life of this asset went from twenty seven and a half to forty. So we are spreading the depreciation over many years therefore the depreciation expense goes down. Therefore you re taking less deduction.
And you don t want this you don t want to take less deduction for tax purposes. You want to take more deductions. Here. The difference is three thousand five hundred and twenty five which is also a positive adjustment.
So simply. But if we go to the excel sheet that i was working with so those are basically positive adjustments. So we have 198 plus plus how much was the amount 3525 so those two are positive adjustments. They re gonna they re gonna add now let s work an example let s keep working an example where would we have negative adjustments okay so now let s look at personal property personal property placed in service after 1998.
Andrew has two depreciable per business asset. Atm depreciation is calculated using the one hundred and fifty percent declining balance. The makers is two hundred percent declining balance..
We have to be careful we are dealing with year eight. We are up to year eight. So remember we are not comparing here one two year one those are temp depreciation is kind of in a sense. It is it is it s a temporary difference in other words over the life of the asset.
The total depreciation will be the same but in some years makers will be more another years. Abs were being moved for example in this in this example that we were earlier and and the other two examples that happened in those years. That makers was greater than abs. Okay.
The makers depreciation amount was greater now. It doesn t doesn t have to be true sometime it reverse okay we re gonna look at this so we have two different asset and we re dealing with year eight. So it s what by the time we got to year eight of these asset let s take a look at them so these are the two. Asset a furniture that we purchased 2009 should be 2009 for 7000.
It s a seven year property makers depreciation is three hundred and twelve dollars amt depreciation is four hundred and twenty nine so notice by here seven amt is a greater now in this example am t. Is greater than makers. Again. Why because depreciation is a temporary difference in some years amt will be more than makers and others the opposite.
Here. We have a negative adjustment. Notice. Because amt is greater therefore the adjustment is negative when we calculate our alternative minimum tax same thing for the other asset.
Twelve thousand seven year makers is five hundred and thirty five i assume you know how to calculate makers and i m gonna show you how to calculate amt amt is seven thirty six now you re wondering word. The 429 and 736 came coming from well. This is the alternative minimum tax..
The 150 declining balance and we are using a property that the seven year property and we re dealing with year eight. Okay so if we take seven thousand times point zero six. One three and twelve thousand times point zero six one three we ll get the depreciation amount of four twenty nine and seven thirty six notice these are negative adjustments. These are negative adjustment.
This is an example of what of a negative adjustment so that s why i wanted to show you well positive adjustments you know i show you positive adjustments. But here are negative adjustments here what we can do we have three hundred and eighteen negative three hundred and eighteen so it s gonna reduce i will our tack. Our amt taxes so certain adjustment reduces our amt taxes and certain adjustments increase them mostly be increased. And this is what work now obviously if we have different depreciation method.
We re going to have different gain and different losses. So let s go ahead and look at an example and see how we how this works suppose we purchase a furniture on february 1st. 2014. 6000 sold it on march 2nd 20.
Let s make this 2016. There s an error here we sold the furniture for four thousand three hundred so let s first take a look at how we compute the gain and losses using makers setup. The two hundred double declining balance so for year one we have the appreciation of 857 in the and for 2015. We have the appreciation of 1469 and for 2016 may have depreciation of 525 using the maker stable now adjust the basis is 3149.
Which has caused year one depreciation here year three and i hope i did not make any calculation errors let me just double check 6000 857 1469 525. Yes my adjusted basis is 3149. I sold it for 4300 consideration. Received the adjusted basis.
Give me again under makers correct for for taxable income for taxable income. For regular taxable income of 11000 at a 1151. Let s go ahead and compute the gain for makers under makers..
I m using the one hundred and fifty percent double declining seven year asset same asset. Okay year one depreciation is 643 year to depreciation as 1791 year. 3. Is 451.
Now consideration. Received is four thousand three hundred adjusted basis of 3758 equal to a gain of 540 here s how i compute ad adjusted basis 6000 year one this should be 1791 451 so notice we have a negative adjustment. This is makers gain and this is amt gain well guess what for amt. I have less gain therefore i pay less taxes less of 609.
There s it there s a negative adjustment. Now there s a negative adjustment of 609 so there we go that s it an example of another negative adjustment negative so i m reducing my taxable income. I m reducing my taxable income because already what happened is the 1151 is already included in my regular taxable income now the under amt. I only have to pay taxes of 541.
They have therefore i reduce my amt by 609 so. He said. We i m reconciling the two in a sense this is another example that shows you the negative adjustments. Hopefully.
This is helpful in illustrating how positive and negative adjustment. Now i may do one more recording that illustrate positive and negative adjustments before i move into preferences if you have any questions any comments by all means email. Me or see me in class. And if you re studying for your cpa exam study.
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