Tax Questions- Capital expenditures, capital gains, AMT Forum

[AJS30]

Have tax exam in a few days and still confused how to classify capital expenditures from ordinary business expenses (thought I understood it, but then going back over some examples and cases, apparently I don't), also a little confused on how you determine if something is a capital gain/loss. Lastly, I have no idea how the alternative minimum tax works......if someone could please explain.

[Jsa725]

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[SemperLegal]

Have tax exam in a few days and still confused how to classify capital expenditures from ordinary business expenses (thought I understood it, but then going back over some examples and cases, apparently I don't), also a little confused on how you determine if something is a capital gain/loss. Lastly, I have no idea how the alternative minimum tax works......if someone could please explain.

Capitalization: If you have something that could be deducted, but it has value for more than a year, you must "Capitalize" it and deduct it over some years. The accounting version of this is depreciation (and most tax people call it this as well). In accounting, you take the object, subtract its salvage price, and then divide it by it expected life. In Tax, however, as an incentive to improve, you can use Modified Accelerated Cost Recovery System, which is a set of tables in the IRC by asset class (e.g. buildings, patents, leases) which allow for shorter, normally straight line, depreciation. (For example, it might tell you that you can deduct 10% of the cost of a warehouse for ten years). Each year that amount is deducted and removed from the basis of the asset. If you have to spend more on the warehouse, you have to decide if it improves the warehouse from its original state (adding rooms, putting in lights, etc.) and then add to basis and depreciate longer, or if its a repair bringing it back to the status quo (repairing damages not from wear and tear) in which case they are presently deductible. Things that are perpetual (land and stock) are not subject to Modified Accelerated Cost Recovery System

Capital Gain or Loss: You have capital gain or loss when you ultimately dispose of non-inventory assets that have had a change of value. You can only recognize capital loss if its a business expense and you have capital gains to offset (you can carry forward and back some losses, and deducts $3k from ordinary income). It essentially income for a market change when you are done with something. Stocks are a unique example of this. If I buy stock for $10, regardless of how many dividends I get (which are "produced" from the stock but don't lessen its inherent value), I have capital gains or losses when I sell (unless I sell for exactly $10). Section 1231 makes this more confusing by stating that when you sell property that was depricable in your hands , you must net basis and income. If you have a positive gain its all capital gains, if its negative its all REGULAR loss.

AMT: Pretty much, if someone pays less than about 26% percentage of their MAGI* after a $40k(ish) exemption, they are required to pay their full regular tax amount and the difference between the AMT and regular tax (essentially, they are paying the AMT amount, however the part that would be regular tax, is still considered regular tax.

*MAGI- Modified Adjusted Gross Income. Pretty much AGI with certain deductions that can be found in section 56 added back in (medical expenses, itemized deductions, R&D costs, etc.)