566 MODULE 36 TAXES: CORPORATE

(5) Adjustments. The following are examples of adjustments to regular taxable income in com-
puting pre-ACE AMTI:
(a) For real property placed in service after 1986 and before 1999, the difference between
regular tax depreciation and straight-line depreciation over forty years
(b) For personal property placed in service after 1986, the difference between regular tax de-
preciation using the 200% declining balance method and depreciation using the 150%
declining balance method
(c) The installment method cannot be used for sales of inventory-type items
(d) Income from long-term contracts must be determined using the percentage of completion
method
(6) Adjusted current earnings (ACE). ACE is a concept based on a corporation's earnings and
profits, and is calculated by making adjustments to pre-ACE AMTI.
AMTI before ACE adjustment and NOL deduction
Add: Tax-exempt interest on municipal bonds (less expenses); except
not interest on tax-exempt bonds issued in 2009 or 2010.
Tax-exempt life insurance death benefits (less expenses)
70% dividends-received deduction
Deduct: Depletion using cost depletion method
Depreciation using ADS straight-line for all property (this
adjustment eliminated for property
placed in service after 1993)
Other: Capitalize organizational expenditures and circulation expenses
Add increase (subtract decrease) in UFO recapture amount (i.e.,
excess of FIFO value over UFO basis)
lnstallment method cannot be used for nondealer sales of property
Amortize intangible drilling costs over five years
Adjusted current earnings (ACE)
- Pre-ACE AMTI
Balance (positive or negative)
x75%
ACE adjustment (positive or negative)
EXAMPLE: Acme, Inc. has adjusted currentearnings of $100,000 and alternative minimum taxable income
(before this adjustment) of $60,000. Since adjusted current earnings exceeds pre-ACE AMTl by $40,000, 75%
of this amount must be added to Acme's AMTI. Thus, Acme's AMTI before exemption for the year is $90,000
[$60,000 + ($40,000 x 75%)).
(a) The ACE adjustment can be positive or negative, but a negative ACE adjustment is lim-
'ited in amount to prior years' net positive ACE adjustments. '
(b) The computation of ACE is not the same as the computation of a corporation's E8lP. For
example, federal income taxes, penalties and fines, and the disallowed portion of business
meals and entertainment would be deductible in computing E&P, but are not deductible in
computing ACE.
(7) Minimum tax credit. The amount of AMT paid is allowed as a credit against regular tax li-
ability in future years.
(a) The credit can be carried forward indefinitely, but not carried back.
(b) The AMT credit can only be used to reduce regular tax liability, not future AMT liability.
(8) Small corporation exemption. A corporation is exempt from the corporate AMT for its first
tax year (regardless of income levels). After the first year, it is exempt from AMT if it passes
a gross receipts test. It is exempt for its second year if its first year's gross receipts do not ex-
ceed $5 million. To be exempt for its third year, the corporation's average gross receipts for
the first two years must not exceed $7.5 million. To be exempt for the fourth year (and subse-
quent years), the corporation's average gross receipts for all prior three-year periods must not
exceed $7.5 million.
EXAMPLE: Zero Corp., a calendar-year corporation, was formed on January 2, 2005, and had gross re-
ceipts for its first four taxable years as follows:
Year Gross receipts
2005 $ 4,500,000
2006 9,000,000
2007 8,000,000
2008 6,500,000