January 14th, 2010 |  Print This Post |  Email This Post

With the turning of the calendar to 2010, many of the opportunities for 2009 AMT planning are gone. This article will provide a brief overview of the AMT strategies that still are available for 2009, as we sit today, and some of these will be explored in more detail in future articles. Many of these items are somewhat narrow in scope, but if just one applies to a particular taxpayer’s situation, it definitely can serve to reduce an AMT bill that otherwise would be due in April.

Depreciation – Rental property and property used in a business may be depreciated. The law allows a taxpayer to choose among several depreciation methods, and this choice is not made until the tax return is filed. Some depreciation methods result in an AMT item while others do not.

Depletion – A taxpayer investing in oil & gas or other mineral properties may take a deduction for his investment in a manner similar to depreciation. Also similar to depreciation, some depletion deductions are AMT items while others are not. This choice is made when the tax return is filed.

Intangible drilling costs and mining costs – The same as depreciation and depletion above, certain cost-recovery methods for these types of investments, which are chosen at tax return time, can trigger the AMT.

R&D – Research and development costs incurred by a business may be deducted currently instead of being amortized over time, resulting an AMT item. If the business is an LLC, partnership or S corporation, this AMT item will be reflected on the taxpayer’s individual Form 1040. The choice of deduction is made at tax return time.

Circulation costs; long-term contracts – Certain types of businesses receive more beneficial treatment of deductions for the Regular Tax than for the AMT, resulting in AMT items. Similar to the R&D, the AMT effect depends on the type of business entity. The choice of deduction is made at tax return time.

Incentive Stock Options (ISOs) – ISOs receive very favorable Regular Tax treatment at the time of their exercise – they simply are not taxed at that time. Instead, assuming the numerous ISO requirements are met, income from these options is not taxed until the underlying stock is sold at a later time. At that point, the income is taxed at favorable long-term capital gain rates instead of ordinary income Regular Tax rates. Under this normal scenario, an AMT item is triggered on the date of exercise. However, a taxpayer has until one year after date of exercise to “disqualify” the options, resulting in ordinary income but also completely eliminating the AMT item. A future article will discuss in some detail this “disqualification” concept as an AMT-planning strategy.