The last three items pertain to specialized industries, but the others may apply to many taxpayers. Multiple-year schedules are also required for taxpayers with net operating losses (NOL) and AMT credits.

Depreciation

Of the items requiring extensive schedules to arrive at both regular tax and AMT deductions, the AMT adjustment for depreciation deductions (and the related basis adjustment for gain or loss upon a sale) is by far the most common.

Example 9 in the MSSP audit guide, a simple example for only one asset, illustrates the information an auditor might request. Samantha is an independent court reporter. On June 6, 1994, she purchases and places into service a new word processor that costs $6,500. For regular tax purposes, depreciation was computed on a 200% declining balance, five-year property basis, as follows:

Year	Basis	Percentage	Depreciation
1	$6,500	20%	$1,300
2	6,500	32	2,080
3	6,500	19.2	1,248
4	6,500	11.52	749
5	6,500	11.52	749
6	6,500	5.76	374

For AMT purposes, depreciation was computed as follows:

The difference between regular and AMT depreciation will require a positive or negative adjustment each year as follows:

Example 10 in the audit guide is a simple illustration of the adjustment upon sale of assets. Given the previous example, assume that Samantha sold the word processor during the third year of use for $5,950:

Gain for Regular Tax Purposes

Gain for AMT Purposes

Sales price	$5,950
Less adjusted basis
Basis	$6,500
Less	($3,213)	($3,287)
Gain on Sale		$2,663

In this example, there is a negative adjustment to AGI of $791.

Passive Activities

The passive activity loss limitation must be computed using the regular tax provisions and, separately, using the AMT provisions. The loss limitation is applied separately to each, with the differences between them resulting in an adjustment.

Example 13 in the audit guide illustrates the information the auditor would request. Don actively participates in a rental real estate activity with the following income and expenses:

Regular Tax AMT Income $50,000 $50,000 Real estate taxes ($9,000) ($9,000) Wages ($11,000) ($11,000) Operating expenses ($25,000) ($25,000) Depreciation (27.5 years) Basis = $400,000 ($14,544) Depreciation (40 years) – ($10,000) Total losses ($9,544) ($5,000)

The adjustment required to be shown on line 11 of Form 6251 will be the difference between the two amounts shown above, an add back of $4,544. This depreciation adjustment must be made as a passive loss adjustment on line 11 and should not be included on line 8-adjustment depreciation, which is the case for all IRC section 56 and 57 adjustments required for passive activity losses.

If this activity were not rental real estate, each of these losses would be suspended. A schedule would be required to determine when there was passive income to allow for the losses to be deducted, for both regular tax purposes and AMT purposes and to determine the amount of losses not used and still suspended.

Loss Limitations

Losses for home offices, at-risk property, and basis activities must be accounted for separately under the regular tax and the AMT.

Example 20 in the audit guide illustrates the information the auditor would request for these loss limitations. Chris is at risk for a property in the amount of $100,000 in 1993. For regular tax purposes, the property has a loss of $125,000. The loss will be limited to the amount at risk of $100,000. After considering all AMT adjustments and preferences, the property has an AMT loss of $90,000, all of which will be deductible in 1993. If in 1994 Chris has a regular loss of $30,000 and an AMT loss of $15,000, he will be allowed no loss for regular purposes and a $10,000 loss for AMT purposes. The 1993 return will show a positive adjustment of $10,000, and the 1994 return will show a negative adjustment or additional loss of $10,000. The suspended loss for regular tax purposes will be $55,000 ($25,000 for 1993 plus $30,000 for 1994) and for AMT purposes will be $5,000 (no suspended loss in 1993, $5,000 in 1994).

Schedules will be required for both regular tax and AMT to account for the amounts suspended in some years and used in others.

Net Operating Losses

The computation of NOL for regular tax purposes is quite complicated. An individual’s current NOL is determined by starting with regular taxable income and making a series of adjustments. The recomputation of taxable income and the tax refund for a carryover year are equally complicated. These same schedules must be completed for AMT, considering AMT adjustments and preferences. The AMT schedules are further complicated by the 90% of AMT income limitation and the independent carryovers that sometimes occur due to the differences in the regular tax NOL and the AMT NOL.

Example 27 in the audit guide contains a simplified illustration of the reconciliation of a regular tax NOL and an AMT NOL. Gary has $700,000 of gross income and $1 million in deductions for 1993. The deductions include $100,000 of depreciation. Depreciation for AMT purposes is $60,000, resulting in an AMT adjustment of $40,000. Gary’s AMT NOL is computed as follows:

Gross Income $700,000 Less: Deductions ($1,000,000) Regular Tax NOL ($300,000) Plus: AMT depreciation Adjustment $40,000 AMT NOL ($260,000)

Documentation Is Crucial

Examination of the audit guide and the audit techniques will assist practitioners in developing proper documentation as tax returns are prepared. Further information can be obtained from the audit guide, at www.irs.gov by searching for MSSP.