26 U.S.C. § 57 — Items of tax preference

(a) General rule: This subsection lists the "items of tax preference" that get added back to figure the alternative minimum tax. (1) Depletion: For each property, if the depletion deduction you took under section 611 for the year is more than the property's adjusted basis at year-end (figured without subtracting that year's depletion), the excess is a preference item. This doesn't apply to percentage depletion figured under section 613A(c), which covers certain independent producers and royalty owners. (2) Intangible drilling costs: (A) Across all of a taxpayer's oil, gas, and geothermal properties, if "excess intangible drilling costs" for the year are more than 65% of the taxpayer's net income from those properties for the year, the amount over 65% is a preference item. (B) "Excess intangible drilling costs" is found in two steps: take the drilling costs deducted for the year under section 263(c) or 291(b) (not counting costs for a well that turned out unproductive); then subtract what would have been allowed if those costs were instead capitalized and recovered through "straight line recovery of intangibles," defined in subsection (b). The difference is the excess. (C) "Net income from oil, gas, and geothermal properties" means: total gross income from those properties for the year, minus the deductions allocable to them (after backing out the excess figured in (B)). (D) You do this calculation separately for geothermal properties and for oil-and-gas properties. (E) There's an exception for independent producers: if the taxpayer isn't an "integrated oil company" (as defined in section 291(b)(4)), this whole intangible-drilling-cost preference item doesn't apply to their oil or gas wells. But the benefit of that exception is capped, it can't reduce alternative minimum taxable income by more than 40% of what that income would otherwise be (figured without this exception and without the alternative-tax net operating loss deduction). (3) and (4): These paragraphs have been repealed. (5) Tax-exempt interest: (A) Interest earned on "specified private activity bonds" (defined below) is a preference item, reduced by any deduction that isn't allowed for regular tax but would have been allowed if that interest were taxable. (B) A mutual fund's "exempt-interest dividend" is treated as interest on a specified private activity bond, to the extent it's paid from interest the fund itself earned on such bonds. (C) "Specified private activity bond" generally means a private activity bond (as defined in section 141) issued after August 7, 1986, whose interest is tax-exempt under section 103, with several exceptions: bonds for qualified 501(c)(3) charities; certain housing bonds (for low-income rental housing, home mortgages, or veterans' mortgages) issued after a specified date, along with matching refunding bonds; refunding bonds for debt originally issued before August 8, 1986; bonds issued shortly before that date (before September 1, 1986) that wouldn't have counted as private activity bonds under a modified, more lenient test; and most bonds issued in 2009 and 2010 (including refundings of bonds from that era, but not refundings of bonds issued 2004-2008). (6) Certain older accelerated depreciation: For property placed in service before January 1, 1987, some amounts that were preference items under the old (pre-1986-Tax-Reform-Act) versions of paragraphs (2), (3), (4), and (12) still count as preference items today, except this doesn't apply to property already covered by the depreciation or pollution-control adjustments in section 56(a)(1) or (5). (7) Small business stock gain exclusion: For qualifying small business stock acquired on or before the enactment of the Creating Small Business Jobs Act of 2010, 7% of the gain excluded from income under section 1202 is a preference item. (b) Straight line recovery of intangibles defined: This subsection defines a term used in (a)(2). (1) Ordinarily, it means spreading (amortizing) intangible drilling costs evenly over 120 months (10 years), starting the month the well begins producing. (2) But a taxpayer can instead elect any method that would be allowed for figuring cost depletion for that well, and use that method for purposes of subsection (a)(2).