Quantifying the Poisoning Effect on Tax Preference Items on the Maximum Tax for a High-Bracket Taxpayer.

This article develops a tax preference decision model which incorporates the "poisoning" effect of tax preference items on the maximum tax calculations. The interaction of the regular minimum tax and the maximum tax is particularly relevant for a taxpayer with large amounts of personal service income who is considering the use of an additional preference deduction. The definition of tax preference items includes several types of accelerated deductions available in common tax-shelter arrangements. The article examines only the benefits and tax costs of electing accelerated depreciation, although the model could be easily generalized to cover other types of preference items. A decision model that incorporates time value of money concepts is needed to properly evaluate the potential benefits and costs of using accelerated depreciation, since both the benefits and costs occur at different points in time. A present value decision model to evaluate the effect of the minimum tax on a corporation electing to use accelerated depreciation has been developed.