Avoiding the “Double Tax Whammy”
Under the Tax Reform Act of 1986 Congress took aim at small to medium sized businesses that had been reducing their overall tax liability by claiming depreciation on equipment they had acquired. Although the subject is rather complex, the net effect is that companies who have used equipment depreciation to significantly lower their tax liability are subject to a review that may have the effect of classifying some of those depreciation write-offs as “tax preferences” and subjecting those same companies to an additional “Alternative Minimum Tax,” in addition to the taxes they would otherwise owe. Owning or purchasing too much equipment, while lowering the traditional tax component, can now trigger the addition of new added taxes. The good news: equipment lease payments that are treated as rentals (real FMV) do not qualify as tax preference items and have no adverse effect on AMT liability.