Question

Falcon, Inc., owns a silver mine that it purchased several years ago for $925,000. The adjusted basis at the beginning of the year is $400,000. For the year, Falcon deducts depletion of $700,000 (greater of cost depletion of $290,000 or percentage depletion of $700,000) for regular income tax purposes.
a. Calculate Falcon’s AMT preference.
b. Calculate Falcon’s adjusted basis for regular income tax purposes.
c. Calculate Falcon’s adjusted basis for AMT purposes.

Answer 1

Part A

It is a positive AMT tax preference as the percentage depletion deduction is greater than the adjusted basis for the silver mine.

Percentage depletion deduction	$700000
Adjusted basis for silver mine	(400,000)
Positive AMT tax preference	$300,000

Part B

Falcon’s adjusted basis for regular income tax purposes = $0.

Because the negative adjusted basis is not considered

Part C

Falcon’s adjusted basis for AMT = $0

Falcon’s adjusted basis for AMT = Adjusted basis for silver mine-depletion + Positive AMT tax preference

($400,000 – $700,000 + $300,000) = $0