What is AMT Depreciation?

by Eric Bank; Updated September 26, 2017
Uncle Sam Tax

When figuring taxable income, a company subtracts the costs of doing business from its gross income to figure the amount of income tax it owes. One such cost is the purchase of a property, or asset, that helps to produce income over a period longer than one year. Companies can't deduct the cost of these long-term assets all at once; they do so in installments over a set number of years -- an accounting procedure known as depreciation. Alternative minimum tax, or AMT, depreciation uses a different method to calculate annual depreciation expense, resulting in smaller annual deductions in the early years.

AMT Depreciation Rules

Congress imposes the AMT to prevent individuals and corporations from paying, in the opinion of the legislators, too little tax. Under regular tax depreciation rules, known as the modified accelerated cost reduction system, or MACRS, companies depreciate long-term property at a certain pace over a defined period, depending on the type of asset. The Internal Revenue Service classifies assets and assigns them a depreciation period. For example, trucks have a depreciation period of five years. MACRS permits accelerated depreciation, meaning that the company can depreciate larger amounts in the early years, yielding larger deductions for newly acquired assets. The fastest depreciation method that the IRS allows is the 200-percent declining balance method, and the slowest is straight-line depreciation, in which the annual depreciation deduction is the same each year. Under AMT depreciation, a company must use a combination of the 150-percent declining balance method and the straight-line method, resulting in a slower depreciation rate.

About the Author

Based in Chicago, Eric Bank has been writing business-related articles since 1985, and science articles since 2010. His articles have appeared in "PC Magazine" and on numerous websites. He holds a B.S. in biology and an M.B.A. from New York University. He also holds an M.S. in finance from DePaul University.

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