Catherine purchased furniture and fixtures (7-year property) for her shop for $80,000 in May 2013. What AMT depreciation adjustment is required in 2013?
A. $0
B. $2,864
C. $8,568
D. $11,432
The answer is A?
Well, in this case, the AMT (Alternate Minimum Tax) depreciation adjustment in 2013 would be $0. Just like a magician making something disappear, there's no adjustment needed because the answer is A!
To determine the AMT depreciation adjustment required in 2013, we need to calculate the depreciation using the Modified Accelerated Cost Recovery System (MACRS) method.
The furniture and fixtures are considered 7-year property, which falls under the MACRS depreciation schedule. The applicable depreciation rates for the first year is 14.29%.
To calculate the depreciation deduction for the first year, multiply the cost of the property ($80,000) by the depreciation rate (14.29% or 0.1429):
Depreciation deduction = $80,000 * 0.1429 = $11,432
However, the Alternative Minimum Tax (AMT) limits the amount of depreciation that can be deducted, so we need to compare this amount to the AMT limits.
For property placed in service in 2013, the AMT limits the depreciation deduction to $0 for 7-year property.
Therefore, the AMT depreciation adjustment required in 2013 for Catherine's furniture and fixtures is A. $0.
To calculate the AMT (Alternative Minimum Tax) depreciation adjustment for 2013, we need to determine the depreciation deduction for regular tax purposes and for AMT purposes.
In this case, the furniture and fixtures are classified as 7-year property. The Modified Accelerated Cost Recovery System (MACRS) is used to calculate depreciation for tax purposes.
To calculate the regular tax depreciation deduction, we will use the MACRS depreciation method and apply the half-year convention.
Step 1: Determine the MACRS depreciation rate for 7-year property purchased in 2013.
According to the IRS depreciation tables, the MACRS depreciation rate for 7-year property acquired in 2013 is 14.29%.
Step 2: Calculate the regular tax depreciation deduction.
The regular tax depreciation deduction is calculated using the following formula:
Regular Tax Depreciation Deduction = (Cost Basis of Property) x (MACRS Depreciation Rate)
Regular Tax Depreciation Deduction = $80,000 x 14.29% = $11,432
Step 3: Calculate the AMT depreciation adjustment.
To calculate the AMT depreciation adjustment, we compare the regular tax depreciation amount to the AMT depreciation amount.
In 2013, the AMT depreciation rate for 7-year property is 200% of the straight-line depreciation rate. The straight-line depreciation rate for 7-year property is 14.29% divided by the recovery period of 7 years, which equals 2.04%.
AMT Depreciation Adjustment = (Cost Basis of Property) x (AMT Depreciation Rate - Regular Tax Depreciation Rate)
AMT Depreciation Adjustment = $80,000 x (2.04% - 14.29%) = $0
Accordingly, the correct answer is A. $0.