In this lesson, you will learn the basic concepts

of the corporate alternative minimum tax,

or AMT, and it's computation.

Congress created AMT to ensure that no taxpayer with

substantial economic income can avoid

significant tax liability by using exclusions, deductions and credits.

In other words, AMT acts as a safeguard to ensure that taxpayers pay their fair share.

In fact, AMT was extended from individuals to

corporations in response to highly publicized cases of

corporations reporting large profits and their financial statements to

shareholders but paying little to no corporate income taxes.

However, the AMT is both cumbersome and complicated,

with some experts referring to it as

a complex statutory scheme that takes many twists and turns.

Not to worry though, this lesson will not delve too deep into AMT details.

There are so many other topics we can explore instead.

From a conceptual standpoint,

it is helpful to visualize the AMT as

a completely separate and distinct tax system

that runs parallel to the regular tax system.

Most corporations are required to calculate

tax liability under both systems and then pay the higher of the two.

In general, the AMT system operates by limiting or eliminating certain tax deductions,

credits and other preference items.

Thus, the first of the three steps in computing AMT is to

determine alternative minimum taxable income, or AMTI.

AMTI is essentially regular taxable income with numerous adjustments.

For example, the AMT system often uses longer recovery periods for calculating

depreciation expense requiring an adjustment to taxable income to arrive at AMTI.

Another adjustment, called the adjusted current earnings, or ACE,

increases AMTI for specific items that are

excluded from regular taxable income such as tax exempt interest,

dividends, received deductions, the difference between LIFO and

FIFO inventory and a portion of deferred gains on installment sales.

See code sections 56,

57 and 58 for further details if interested.

Next, AMTI is reduced by an exemption amount,

which begins at $40,000 and phases out as AMTI increases.

Specifically, the exemption amount declines by 25% of

the amount by which AMTI exceeds $150,000.

The $40,000 starting point,

has not changed since 1986.

Finally, the AMT base,

which is AMTI after applying the allowed exemption,

is multiplied by the corporate AMT rate of 20%.

The result is referred to as the tentative minimum tax.

AMT is, thus, the amount by which the TMT,

tentative minimum tax, exceeds the corporation's regular tax.

The corporation must pay any amount of positive AMT.

Note that a corporation receives a minimum tax credit if it pays AMT.

This credit can be used to offset future regular taxes.

In essence, AMT is a prepayment on corporate preferences and AMT adjustments.

Code section 55E exempt small corporations from AMT,

which it defines as those where

average annual gross receipts for all three taxable year periods,

ending before such taxable year,

does not exceed $7.5 million dollars.

For corporations first three year period,

the limit is set at $5 million.

As you might expect, the corporate AMT is definitely not cherished by taxpayers.

Many critics place complete repeal of AMT high on their legislative wish list.

In short, the AMT is criticized for failing to advance

any legitimate policy objectives such as efficiency or fairness,

raising insufficient revenue, reducing the value of investments that Congress

intended to encourage with targeted tax incentives and imposing hefty compliance costs.

Although these criticisms are broadly supported in Congress,

the government's tax revenue loss from AMT repeal would be substantial.

Thus, many believe it will take

a complete overhaul of the federal tax system to remove it.

Lesson 2.4.1 Corporate Alternative Minimum Tax: Concepts

Taxation of Business Entities I: Corporations

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