CFR > Title 26 - Internal Revenue > CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY > SUBCHAPTER A—INCOME TAX (Parts 1–19) > PART 1—INCOME TAXES > 1.58-9—Application of the tax benefit rule to the minimum tax for taxable years beginning prior to 1987.

1.58-9—Application of the tax benefit rule to the minimum tax for taxable years beginning prior to 1987.

(a) In general. For purposes of computing the minimum tax liability imposed under section 56 of the Internal Revenue Code of 1954 (Code), taxpayers are not liable for minimum tax on tax preference items that do not reduce the taxpayer's tax liability under subtitle A of the Code for the taxable year. In general, tax preference items that do not reduce tax liability under subtitle A for the taxable year are those from which no current tax benefit is derived because available credits would have reduced or eliminated the taxpayer's regular tax liability if the preference items had not been allowed in computing taxable income. However, any credits that, because of such preference items, are not needed for use against regular tax (“freed-up credits”), are required to be reduced under the rules of paragraph (c) of this section. For purposes of this section, a taxpayer's regular tax is the Federal income tax liability under subchapter A of chapter 1 of the Code, not including the minimum tax imposed by section 56. Unless otherwise noted, all references to Internal Revenue Code sections refer to the Internal Revenue Code of 1954.
(b) Effective date. The rules of this section are effective May 5, 1992, but only as they affect tax preference items that arise in taxable years beginning after December 31, 1976, and before January 1, 1987.
(c) Adjustment of carryover credits— (1) In general. A taxpayer's freed-up credits must be reduced by the additional minimum tax that would have been imposed if a current tax benefit had been derived from preference items that did not actually produce a current tax benefit. The amount of this reduction shall be calculated in the following manner—
(i) Determine the amount of freed-up credits;
(ii) Determine the amount of tax preference items (if any) from which a current tax benefit was derived for the taxable year (“beneficial preferences”), and the amount of preferences from which no current tax benefit was derived for the taxable year (“non-beneficial preferences”); and
(iii) Determine the portion of the total minimum tax on all tax preference items for the taxable year that is attributable to the non-beneficial preferences.
The freed-up credits are then reduced by an amount equal to such portion of the minimum tax.
(2) Determine freed-up credits. (i) To determine the freed-up credits for the taxable year, first determine the regular tax that would have been imposed for the taxable year if preference items had not been allowed in computing taxable income (“non-preference regular tax”). In the case of a taxpayer with the capital gain preference described in section 57(a)(9)(B), non-preference regular tax is computed without regard to section 1201 and without adding the section 57(a)(9)(B) preference amount to taxable income. Second, compute the amount of credits that would have been allowed to reduce the non-preference regular tax. The credits available to reduce non-preference regular tax shall include any freed-up credits from other taxable years, as reduced under paragraph (c)(5) of this section, that are carried to the current taxable year. Third, subtract the amount of credits that were actually allowed to reduce the regular tax for such taxable year from the amount of credits that would have been allowed to reduce non-preference regular tax. The result is the amount of the freed-up credits.
(ii) The following examples illustrate the determination of freed-up credits. The first two examples assume that the foreign tax credits being used do not exceed the limitation under section 904.

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Example 1. In 1982 Corporation B has $17.6 million dollars in foreign tax credits available for the taxable year. If preference items were not allowed in determining regular tax, the regular tax would have been $10.2 million and foreign tax credits used to reduce regular tax would have been $10.2 million. Because of tax preference items, however, B's regular tax is $6.3 million and the amount of foreign tax credits actually used to reduce the regular tax is $6.3 million. The amount of freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3 million).
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Code of Federal Regulations

Example 2. Assume the same facts as in Example 1 of paragraph (c)(2)(ii) of this section except that Corporation B has $7.2 million dollars in foreign tax credits. If preference items were not allowed, the non-preference regular tax would have been $10.2 million and the foreign tax credits used to reduce the regular tax would have been $7.2 million. Because of tax preference items, however, B's regular tax is $6.3 million, and the amount of foreign tax credits actually used to reduce the regular tax is $6.3 million. The amount of freed-up foreign tax credits is $.9 million ($7.2 million minus $6.3 million).

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Example 3. In 1983 Corporation C has $500,000 of investment tax credits available. If preference items were not allowed, non-preference regular tax would have been $690,000 and all $500,000 of investment tax credits would have been allowed to reduce non-preference regular tax liability. Because of tax preferences, however, C's actual regular tax is $439,750. As a result of the limitation under section 38(c), only $377,537 of the investment tax credits are allowed to reduce the actual regular tax. Freed-up credits are $122,463 ($500,000 minus $377,537).

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Example 4. In 1984 Corporation B has ordinary income of $20,000 and net section 1201 gain of $300,000, none of which is attributable to foreign sources. B has no other items of tax preference in 1984. B's non-preference regular tax for 1984 is $126,950, the amount of tax that would be imposed without regard to section 1201.
(3) Determination of beneficial and non-beneficial preferences— (i) In general. The amount of tax preferences from which a current tax benefit is derived (“beneficial preferences”) and the amount from which no current tax benefit is derived (“non-beneficial preferences”) for the taxable year are determined as set forth below.
(ii) Regular tax liability is the same regardless of preference items. (A) If the taxpayer's tax liability (after credits) would be the same regardless of whether preference items were allowed to reduce taxable income, then all of the taxpayer's preference items are non-beneficial preference items.
(B) The following example illustrates the rule set forth in paragraph (c)(3)(ii)(A) of this section. This example assumes that foreign tax credits being used do not exceed the limitation under section 904.

Code of Federal Regulations

Example. (i) In 1982 Corporation B has $17.6 million dollars in foreign tax credits available for the taxable year. If preference items were not allowed in determining regular tax, the regular tax would have been $10.2 million and foreign tax credits used to reduce regular tax would have been $10.2 million. Because of tax preference items, however, B's regular tax is $6.3 million and the amount of foreign tax credits actually used to reduce the regular tax is $6.3 million. The amount of freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3 million). (ii) The total amount of B's tax preference items is $8.4 million. B's non-preference regular tax is $10.2 million and, reduced by foreign tax credits, is zero. B's actual regular tax is $6.3 million and, reduced by foreign tax credits, is zero. Since the amount of credits that would have been allowed to offset the non-preference regular tax would have reduced such tax to an amount ($0) equal to the actual regular tax liability ($0), B received a tax benefit from none of the $8.4 million of tax preferences and therefore all of these preferences are non-beneficial preferences.
(iii) Regular tax liability differs because of preference items. If tax liability (after credits) is less because preference items are allowed to reduce taxable income, then some of these preference items have provided a current tax benefit. In such cases, the amount of beneficial and non-beneficial preferences are determined as follows:
(A) Non-beneficial preferences. (1) The non-beneficial preferences are determined by converting the freed-up credits for such taxable year into an amount of taxable income. To make this conversion, freed-up credits are “grossed up” (i.e., divided by the regular tax marginal rate at which such credits would have offset non-preference regular tax) to determine the amount of tax preferences that freed up such credits. For purposes of this calculation, the 5-percent addition to tax provided by section 11(b) shall be included in determining the marginal rate. The aggregate of these grossed-up amounts is the total amount of non-beneficial preferences for the taxable year.
(2) The freed-up credits shall be grossed up beginning at the lowest marginal tax rate that would have applied to the additional taxable income arising if tax preferences were not allowed. Thus, the marginal tax rates at which the actual regular tax was imposed shall not be taken into account in grossing up freed-up credits, even if all or a portion of such tax is not offset by credits because of limitations on the allowance of such credits (such as the section 904 limit on foreign tax credits or the section 38(c) limit on investment tax credits). For example, if the first dollar of additional non-preference taxable income would have been taxed at a rate of 46 percent, then freed-up credits shall be grossed up at 46 percent, even if regular tax imposed on taxable income at a 40-percent rate was not offset by credits because of the limitations on investment tax credits under section 38(c). See Examples 1 and 2 in paragraph (d) of this section for illustrations of the gross up of freed-up credits in cases where limitations apply to the amount of credit allowed to offset actual regular tax.
(3) The following example illustrates the gross up of freed-up credits to determine non-beneficial preferences. This example assumes that foreign tax credits being used do not exceed the limitation under section 904.

Code of Federal Regulations

Example. (i) Corporation L has the following items for the 1985 taxable year:
Actual taxable income $90,000
Regular tax 21,750
Available credits:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 25,000
Investment tax credits carried forward from 1984 20,000
60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985 15,000
Foreign tax credits carried forward from 1984 6,750
21,750
Actual regular tax liability 0
Preferences 110,000
Taxable income for 1985 determined as though preferences were not allowed 200,000
Non-preference regular tax 71,750
Credits allowed to offset non-preference regular tax:
Foreign tax credits for 1985 15,000
Foreign tax credits carried forward from 1984 25,000
Investment tax credits carried forward from 1984 20,000
60,000
Non-preference regular tax liability 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus $21,750). The non-preference regular tax of $71,750 is determined by applying the regular tax rates set forth in section 11(b) to the $200,000 of taxable income as follows:
Taxable income Rate Tax
$25,000 X .15 = $3,750
25,000 X .18 = 4,500
25,000 X .30 = 7,500
25,000 X .40 = 10,000
100,000 X .46 = 46,000
$200,000 $71,750
(iii) Thus, for purposes of determining the non-beneficial preferences, freed-up credits are grossed up as follows: The credits allowed against the regular tax and the freed-up credits are treated as offsetting non-preference regular tax in the same order as such credits would have been allowed to offset such tax, beginning at the lowest marginal tax rate. The freed-up credits are grossed up beginning at the lowest marginal tax rate at which additional taxable income would have been taxed if preferences were not allowed. Thus, in this example freed-up credits are grossed up beginning at 40 percent, and the amount of L's non-beneficial preferences for the 1985 taxable year is $84,456.
Type Credit allowed against regular tax Freed-up credit Divided by tax rate Non-beneficial preferences
FTC (85) $3,750 .15
Do 4,500 .18
Do 6,750 .30
FTC (84) 750 .30
Do 6,000 .40
Do $4,000 .40 = $10,000
Do 14,250 .46 = 30,978
ITC (84) 20,000 .46 = 43,478
$21,750 $38,250 $84,456
Foreign tax credit = FTC (year) Investment tax credit = ITC (year)
(B) Beneficial preferences. The amount of beneficial preferences for the taxable year is computed by subtracting the non-beneficial preferences for the taxable year from the total amount of tax preferences for such year. This rule may be illustrated by the following example:

Code of Federal Regulations

Example. Assume the same facts as in the Example in paragraph (c)(3)(iii)(A)(3) of this section. The amount of L's beneficial preferences for 1985 is $25,544 (total preferences of $110,000, minus non-beneficial preferences of $84,456).
(4) Determine the minimum tax attributable to non-beneficial preferences. (i) The portion of the minimum tax that is attributable to the non-beneficial preferences is computed as follows—
(A) Compute the minimum tax that would be imposed on all tax preference items for the taxable year if all of the preferences had produced a tax benefit.
(B) Compute the minimum tax that would be imposed on the beneficial preferences if these were the taxpayer's only preferences. (This is the amount of minimum tax actually imposed for the taxable year.)
(C) Subtract the amount computed in paragraph (c)(4)(i)(B) of this section from the amount computed in paragraph (c)(4)(i)(A) of this section. The result is the minimum tax attributable to the non-beneficial preferences for the taxable year. This amount is sometimes referred to hereinafter as the “credit reduction amount”.
(ii) The following examples illustrate determination of the credit reduction amount. These examples assume that foreign tax credits being used do not exceed the limitation under section 904.

Code of Federal Regulations

Example 1. (i) In 1982 Corporation B has $17.6 million dollars in foreign tax credits available for the taxable year. If preference items were not allowed in determining regular tax, the regular tax would have been $10.2 million and foreign tax credits used to reduce regular tax would have been $10.2 million. Because of tax preference items, however, B's regular tax is $6.3 million and the amount of foreign tax credits actually used to reduce the regular tax is $6.3 million. The amount of freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3 million). (ii) The total amount of B's tax preference items is $8.4 million. B's non-preference regular tax is $10.2 million and, reduced by foreign tax credits, is zero. B's actual regular tax is $6.3 million and, reduced by foreign tax credits, is zero. Since the amount of credits that would have been allowed to offset the non-preference regular tax would have reduced such tax to an amount ($0) equal to the actual regular tax liability ($0), B received a tax benefit from none of the $8.4 million of tax preferences and therefore all of these preferences are non-beneficial preferences. (iii) Since B has $8.4 million in total preference items and no regular tax liability, the minimum tax on that amount would be $1,258,500 (($8.4 million minus $10,000) multiplied by .15). None of the preference items is a beneficial preference. Thus, the minimum tax attributable to non-beneficial preferences (and therefore, the credit reduction amount) is $1,258,500.

Code of Federal Regulations

Example 2. (i) Corporation L has the following items for the 1985 taxable year:
Actual taxable income $90,000
Regular tax 21,750
Available credits:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 25,000
Investment tax credits carried forward from 1984 20,000
$60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 6,750
$21,750
Actual regular tax liability 0
Preferences 110,000
Taxable income for 1985 determined as though preferences were not allowed 200,000
Non-preference regular tax 71,750
Credits allowed to offset non-preference regular tax:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 25,000
Investment tax credits carried forward from 1984 20,000
$60,000
Non-preference regular tax liability 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus $21,750). The non-preference regular tax is $71,750. The amount of L's non-beneficial preferences for the 1985 taxable year is $84,456. (iii) The minimum tax on L's total preference items of $110,000 would be $15,000 (($110,000 minus $10,000) multiplied by .15). Since the amount of non-beneficial preferences is $84,456, the amount of L's beneficial preferences for 1985 is $25,544 ($110,000 minus $84,456). The minimum tax on L's beneficial preferences of $25,544 is $2,332 (($25,544 minus $10,000) multiplied by .15). (This is the amount of minimum tax imposed for 1985.) The minimum tax attributable to non-beneficial preference items (and therefore, the credit reduction amount) is $12,668 ($15,000 minus $2,332).
(5) Reduction of freed-up credits— (i) In general. The freed-up credits are reduced by an amount equal to the minimum tax attributable to the non-beneficial preferences (“credit reduction amount”). If the taxpayer has only one type of freed-up credit (i.e., only investment tax credit or only foreign tax credit) and that credit was earned in only one year (the current year or a carryover year), then the credit is reduced by the credit reduction amount. This rule may be illustrated by the following example. This example assumes that foreign tax credits being used do not exceed the limitation under section 904.

Code of Federal Regulations

Example. (i) In 1982 Corporation B has $17.6 million dollars in foreign tax credits available for the taxable year. If preference items were not allowed in determining regular tax, the regular tax would have been $10.2 million and foreign tax credits used to reduce regular tax would have been $10.2 million. Because of tax preference items, however, B's regular tax is $6.3 million and the amount of foreign tax credits actually used to reduce the regular tax is $6.3 million. The amount of freed-up foreign tax credits is $3.9 million ($10.2 million minus $6.3 million). (ii) The total amount of B's tax preference items is $8.4 million. B's non-preference regular tax is $10.2 million and, reduced by foreign tax credits, is zero. B's actual regular tax is $6.3 million and, reduced by foreign tax credits, is zero. Since the amount of credits that would have been allowed to offset the non-preference regular tax would have reduced such tax to an amount ($0) equal to the actual regular tax liability ($0), B received a tax benefit from none of the $8.4 million of tax preferences and therefore all of these preferences are non-beneficial preferences. (iii) Since B has $8.4 million in total preference items and no regular tax liability, the minimum tax on that amount would be $1,258,500 (($8.4 million minus $10,000) multiplied by .15). None of the preference items is a beneficial preference. Thus, the minimum tax attributable to nonbeneficial preferences (and therefore, the credit reduction amount is $1,258,500. (iv) All of the $3.9 million of freed-up credits are foreign tax credits that arise in the same year and that otherwise would be carried forward. Since the entire amount of B's tax preferences are non-beneficial preferences, the minimum tax of $1,258,500 that would be imposed on the total tax preferences is the credit reduction amount. Thus, B's $3.9 million of freed-up foreign tax credits is reduced by $1,258,500. The foreign tax credit carryforward from 1982 is $10,041,500. This amount is the sum of $2,641,500 (the freed-up foreign tax credit of $3,900,000, reduced by the credit reduction amount of $1,258,500), plus $7.4 million (the foreign tax credit that would have been carried over even if tax preference items had not been allowed).
However, if the taxpayer has more than one type of freed-up credit, or the taxpayer's freed-up credits are from more than one taxable year, then the credit reduction amount must be allocated under the exact method described in paragraph (c)(5)(ii) of this section, unless an election is made under paragraph (c)(5)(iii) of this section to use the simplified method.
(ii) Exact method. For each type of freed-up credits and for each taxable year within such type from which any such credits are earned, the amount of credit reduction shall be equal to the amount of minimum tax attributable to the non-beneficial preferences that freed up the credits for that type and taxable year. The amount of the credit reduction is computed by multiplying the amount of non-beneficial preferences which freed up credits for each type and taxable year by the minimum tax rate. For purposes of this computation, if the amount of the taxpayer's minimum tax exemption for the taxable year (as determined under section 56(a)) exceeds the amount of the taxpayer's beneficial preferences, such excess exemption shall reduce the amount of non-beneficial preferences to be multiplied by the minimum tax rate. The non-beneficial preferences shall be reduced by any such excess exemption in the same order in which the credits that were freed up by such preferences would have been allowed to offset tax. Thus, for example, any excess exemption shall first reduce non-beneficial preferences that freed up foreign tax credits. Any such excess exemption remaining after reducing non-beneficial preferences that freed up foreign tax credits to zero would then be used to reduce the non-beneficial preferences that freed up investment tax credits.
(iii) Simplified method— (A) Description of method. In lieu of the exact credit reduction method described in paragraph (c)(5)(ii) of this section, taxpayers may elect to use the simplified credit reduction method. Under the simplified credit reduction method, the amount of freed-up credits for each type of credit and for each taxable year in which such credit is earned is multiplied by a fraction. The numerator of the fraction is the total credit reduction amount as determined in paragraph (c)(4)(i)(C) of this section. The denominator is the total amount of freed-up credits as determined in paragraph (c)(2)(i) of this section. The product of this multiplication is the amount of credit reduction for each type and taxable year of freed-up credit.
(B) Election to use simplified method. A taxpayer may elect to use the simplified credit reduction method for all taxable years to which this section applies by attaching a statement indicating such an election on the amended Federal income tax return or returns applying the adjustments of this section. If an election is made for any taxable year, it must be made for all taxable years. Once an election has been made, it can be revoked only with the permission of the Commissioner. Similarly, once returns have been filed applying the exact credit reduction method, an election to apply the simplified method can be made only with the consent of the Commissioner.
(iv) Effect of credit reduction on credit carryovers. Under both the exact method and the simplified method, the determination of credit carryovers to other taxable years is made on the basis of freed-up credits remaining after such reduction, plus any other unused credits. Thus, an amount of freed-up credits that is equal to the credit reduction amount shall not be allowed to reduce tax liability in any taxable year. Such disallowance is without regard to whether such credits would otherwise be allowed as a carryover. The freed-up credits, as reduced under this paragraph (c)(5), shall be carried over or carried back in applying this section in a carryover or carryback year. No minimum tax liability shall be due with respect to the non-beneficial preferences for any taxable year.
(v) Examples. The following examples illustrate reduction of freed-up credits.

Code of Federal Regulations

Example 1. (i) Corporation L has the following items for the 1985 taxable year:
Actual taxable income $90,000
Regular tax 21,750
Available credits:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 25,000
Investment tax credits carried forward from 1984 20,000
60,000
Credit allowed to offset actual regular tax:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 6,750
21,750
Actual regular tax liability 21,750
Preferences 110,000
Taxable income for 1985 determined as though preferences were not allowed 200,000
Non-preference regular tax 71,750
Credits allowed to offset non-preference regular tax:
Foreign tax credits for 1985 $15,000
Foreign tax credits carried forward from 1984 $25,000
Investment tax credits carried forward from 1984 20,000
60,000
Non-preference regular tax liability 11,750
(ii) The freed-up credits for 1985 are $38,250 ($60,000 minus $21,750). The non-preference regular tax is $71,750. The amount of L's non-beneficial preferences for the 1985 taxable year is $84.456. (iii) The credit reduction amount for 1985 is $12,668, the amount of minimum tax attributable to L's non-beneficial preferences. This amount is allocated to reduce each category of freed-up credit and to each year from which such credit is carried over. L's $38,250 of freed-up credits consists of $18,250 of foreign tax credits carried forward from 1984, which were freed up by $40,978 of non-beneficial preferences, and $20,000 of investment tax credits carried forward from 1984, which were freed up by $43,478 of non-beneficial preferences. (iv) The apportionment of this credit reduction amount to each category of freed-up credit and each taxable year from which such credits are carried over is determined as follows under the exact credit reduction method: (A) Foreign tax credits carried forward from 1984: Non-beneficial preferences that freed up 1984 FTC×.15=Credit reduction of 1984 FTC $40,978×.15=$6,146 (B) Investment tax credits carried forward from 1984: Non-beneficial preferences that freed up 1984 ITC×.15=Credit reduction of 1984 ITC $43,478×.15=$6,522
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Thus, the foreign tax credits from 1984 that are carried forward to 1986 are $12,104 ($18,250 minus $6,146). The investment tax credits from 1984 that are carried forward to 1986 are $13,478 ($20,000 minus $6,522). (v) The reduction of the freed-up credit under the simplified credit reduction method is as follows: (A) Foreign tax credit carried forward from 1984: [Please see PDF for Formula: EC14NO91.150 ] [Please see PDF for Formula: EC14NO91.151 ] (B) Investment tax credits carried forward from 1984: [Please see PDF for Formula: EC14NO91.152 ] [Please see PDF for Formula: EC14NO91.153 ] Thus, under the simplified credit reduction method, L has $12,206 of foreign tax credits for 1984 ($18,250 minus $6,044) that are carried forward to 1986, and $13,376 of investment tax credits for 1984 ($20,000 minus $6,624) that are carried forward to 1986.

Code of Federal Regulations

Example 2. Assume the same facts as in Example 1 of this paragraph (c)(5)(v), except that the foreign tax credits available for use in 1985 include $10,750 in credits carried forward from 1980 and $14,250 in credits carried forward from 1984, rather than $25,000 carried forward from 1984. Thus, $4,000 of the freed-up foreign tax credit is carried over from 1980. The other $14,250 of freed-up foreign tax credit is carried over from 1984. The non-beneficial preferences that freed up the 1980 foreign tax credit are $10,000. The non-beneficial preferences that freed up the 1984 foreign tax credit are $30,978. Under the exact credit reduction method, the credit reduction amounts for each of these credits are determined as follows: (i) Foreign tax credit carried forward from 1980: $10,000×.15=$1,500 (ii) Foreign tax credit carried forward from 1984: $30,978×.15=$4,646 Thus, the foreign tax credit from 1984 that is carried forward to 1986 is $9,604 ($14,250 minus $4,646). Since the foreign tax credit from 1980 expires after 1985, none of that credit is carried forward to 1986.
(d) Examples. The following examples are comprehensive illustrations of the adjustments described in paragraph (c) of this section:

Code of Federal Regulations

Example 1. (i) This example illustrates the operation of the credit reduction adjustment when the amount of foreign tax credit allowed is subject to the overall limitation under section 904. For purposes of this example, assume that Corporation × has the following items for the 1984 taxable year: Taxable income (determined as though preferences were not allowed) $140,000 From foreign sources 70,000 Foreign tax credits from 1984 5,000 Foreign tax credits from 1983 7,000 Actual taxable income 50,000 From foreign sources 25,000 (ii) The credit reduction adjustment and minimum tax liability for the taxable year are determined as follows:
1. Taxable income (determined as though preferences were not allowed) $140,000
2. Tax preferences for 1984 90,000
3. Taxable income (line 1 minus line 2) 50,000
4. Regular tax on line 3 amount (actual regular tax) before credits:
$25,000×.15=$3,750
25,000×.18=4,500 8,250
5. Foreign tax credits allowed against regular tax (limited to 50% of actual regular tax under sec. 904)—1984 foreign tax credits 4,125
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6. Regular tax after credits (line 4 minus line 5) 4,125
7. Regular tax on line 1 amount (non-preference regular tax) before credits
25,000×.15=$3,750
25,000×.18=4,500
25,000×.3=7,500
25,000×.4=10,000
40,000×.46=18,400 44,150
8. Foreign tax credits allowed against non-preference regular tax:
$5,000 (1984 foreign tax credits)
7,000 (1983 foreign tax credits) 12,000
(the allowed credits do not exceed the section 904 limitation of $22,075)
9. Non-preference regular tax after credits (line 7 minus line 8) 32,150
10. Freed-up credits (line 8 minus line 5):
1984 foreign tax credits $5,000
(4,125)
$875
1983 foreign tax credits $7,000
0
7,000
Total $7,875
11. Non-beneficial preferences are computed as set forth in the table below. Under this computation, non-beneficial preferences are considered to free up credits that would have offset non-preference regular tax beginning at the lowest tax rates at which income that was offset by tax preferences otherwise would have been subjet to regular tax. In this case, income that was offset by tax preferences would have been taxed beginning at the 30 per cent marginal tax rate.
Type Freed-up credit Divided by tax rate Non-beneficial preferences
FTC (84) $875 .30 $2,917
FTC (83) 6,625 .30 22,083
Do 375 .40 938
7,875 25,938
Total non-beneficial preferences 25,938
12. Beneficial preferences (line 2 minus line 11) 64,062
13. Minimum tax on total tax preferences ((line 2 minus the greater of line 6 or $10,000)×.15) 12,000
14. Minimum tax on beneficial preferences ((line 12 minus the greater of line 6 or $10,000)×.15) 8,109
15. Credit reduction amount (line 13 minus line 14) 3,891
16. Reduction of freed-up credits under the exact method (subtotals of line 11 multiplied by .15):
(a) 1984 foreign tax credits:
$2,917×.15=$438
(b) 1983 foreign tax credits:
($22,083 $938) ×.15=$3,453
(c) Total credit reduction 3,891
Note: If X had elected to use the simplified credit reduction method, the amount of credit reduction would