Category: Deductions &
Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Taxpayer plans to make an ADS election for certain assets placed in service in the current tax year. The effect of this election is to compute depreciation for regular tax purposes on a straight line basis using the longer ADS life. For AMT purposes, the taxpayer wishes to use the 150% declining balance method over the ADS life. Issue Does the fact that the taxpayer elected ADS for regular tax purposes (which requires use of straight line depreciation) affect the taxpayer's ability to use 150% declining balance method for AMT purposes on the assets to which the ADS election applies? Answer The ADS election for regular tax purposes precludes the use of 150% declining balance for AMT purposes for the affected assets. Discussion Depreciation for AMT purposes is controlled by Section 56(a)(1)(i) and (ii). · Section 56(a)(1)(i) says AMT depreciation is computed using the ADS system, in general the longer ADS lives and the straight line method. · Section 56(a)(1)(ii) provides for purposes of the AMT, 150% declining balance methodology overrides the straight line method under the ADS system. · But, the last sentence of Section 56(a)(1)(ii) says the 150% declining balance method does not apply if the depreciation deduction under Section 168 for regular tax purposes uses the straight line method. · Since the taxpayer has made an ADS election for regular tax purposes, depreciation for regular tax purposes is computed using the straight line method. · Because straight line is used for regular tax, the last sentence of Section 56(a)(1)(ii) denies 150% declining balance for AMT purposes. Legislative Change Note: Section 402(a) of the Taxpayer Relief Act of 1997 changes this result set forth above for property placed in service after 1998. For such assets, AMT depreciation is computed using the regular tax life and 150% declining balance. |
