Alternative Minimum Tax (AMT) Depreciation
 
Written by: Steven D. Beaucaire, MST
Director - Tax | Bedford Cost Segregation, LLC

As time goes on more and more people are being included in a not so select club, those paying AMT. One of the adjustments to taxable income to get to alternative minimum taxable income (AMTI) is depreciation. For AMT purposes, one cannot use the General Depreciation System (GDS) under MACRS. Certain adjustments must be made to MACRS deductions claimed for regular tax purposes. However, no adjustment need be made if the taxpayer uses the Alternative Deprecation System (read longer lives) in lieu of the GDS.

The adjustments necessary are defined by the date the assets were placed in service. Assets placed in service between December 31, 1986 and December 31, 1998 have adjustments different from assets placed in service after December 31, 1998. Assets placed in service prior to January 1, 1999 are adjusted by changing both the lives of the assts and the method of depreciation. Assets added after December 31, 1998 are adjusted by changing only the method of depreciation and only on assets using the 200% DB (3, 5, 7 and 10-year assets) and §1250 property not using straight-line depreciation.

The bonus depreciation allowance was fully allowed for AMT purposes and by law, an asset for which bonus depreciation was elected could not have an AMT adjustment. These rules apply to Gulf Opportunity Zone and Liberty Zone property as well.

Quite often we are approached by taxpayers who, while they want to take advantage of a cost segregation study, do not want to incur any potential AMT problems. The answer is a three part answer.

1. Assets eligible for Bonus deprecation: Bonus and AMT deprecation are the same by statute, so there can be no AMT issues on those assets.

2. AMT deprecation is the same for 39-year and 27.5-year assets as GDS (post 1998) so they are in the clear.

3. For the others, one can elect the AMT method for the 5-year and 15-year assets in the study thereby insuring no AMT adjustment for deprecation of those assets. The election is done on new assets simply by doing your deprecation using those methods in the filing of your tax return. Form 3115, Change in Accounting Method, is used for those assets for which a method has already been established.

Below is a chart contrasting the differences between the methods and asset lives used to calculate both MACRS GDS deductions and MACRS AMT deductions.


MACRS Property Placed in Service After 1998
MACRS Regular Tax Depr'n	MACRS AMT Tax Depr'n
200% DB Method (used in 3, 5, 7 & 10-year property not §1250 property)	150% DB method and regular tax life
150% DB (15 & 20-year property not §1250 property)	No adjustment required
150% DB (15 & 20-year property that is §1250 property)	Straight-line method and regular tax life
150% DB (elected on 3, 5, 7 property)	No adjustment required
Straight-line (27.5 & 39-year property)	No adjustment required




MACRS Property Placed in Service After 1986 and Before 1999
MACRS Regular Tax Depr'n	MACRS AMT Tax Depr'n
200% DB Method (used in 3, 5, 7 & 10-year property not §1250 property)	150% DB method and ADS tax life*
150% DB (15 & 20-year property not §1250 property)	No adjustment required
150% DB (15 & 20-year property that is §1250 property)	Straight-line method and regular tax life
150% DB (elected on 3, 5, 7 property)	No adjustment required
Straight-line (27.5 & 39-year property)	No adjustment required

In computing depreciation, both regular MACRS and AMT MACRS must use the same convention, i.e. half-year, mid-month, or mid-quarter.

*ADS lives are generally longer than the lives used in the GDS, for instance a 5-year asset has a 9-year life in Guideline Class 57.0. The actual ADS life depends on the Guideline Class in Rev. Proc. 87-56.