Understanding the Corporate AMT (Alternative Minimum Tax)

Blog Layout

Understanding the Corporate AMT (Alternative Minimum Tax)

Jun 28, 2017

by Gregory S. Dowell

Like individuals, corporations are also subject to an alternative minimum tax. Without planning or consideration, this tax can also become a trap for the unwary.

The corporate alternative minimum tax (“AMT”) is perhaps best understood as a separate and distinct method of taxation that runs parallel to the “regular” corporate income tax. Every corporation must calculate its tax burden under both the regular corporate income tax and the AMT, and pay the higher of the two. Just as with the individual AMT, the corporate AMT is intended to make sure that a corporation pays at least some minimum amount of tax by limiting or eliminating certain deductions, credits, and other tax preference items. As a result of these adjustments and limitations under this parallel system, a corporation determines its alternative minimum taxable income (“AMTI”), which is the first step in determining whether AMT is applicable for a given year.

In general, AMTI is taxable income, subject to a number of special adjustments. Some items, such as depreciation, pollution control facilities, depletion and intangible drilling costs, may be treated differently for AMT than for regular tax. In addition, most corporate taxpayers must include an adjusted current earnings (ACE) adjustment to AMTI. This adjustment increases AMTI for items excluded from regular tax such as tax-exempt interest, certain dividends received deductions, the difference between LIFO and FIFO inventory and a portion of the deferred gain on installment sales. The corporate AMT rate of 20% is then imposed on the AMTI, but only to the extent that AMTI exceeds an exemption amount of $40,000. The exemption amount of $40,000 is further subject to a phase-out as income increases; the exemption is reduced by 25% of the amount by which AMTI exceeds $150,000.

The corporate AMT generates a minimum tax credit for any AMT paid. This credit is used against regular tax (but limited by any AMT) where the taxpayer is paying regular tax. As a result, AMT is essentially a prepayment of regular tax. However, it may be years before the prepayment of AMT represented by the minimum tax credit is recoverable.

Certain “small” corporations are exempt from the AMT. These are corporations whose average annual gross receipts for all three-year periods beginning after 1993 and ending before the current year do not exceed $7.5 million. For the corporation’s first three-year period (or portion of a period), the limit is $5 million instead of $7.5 million.

Because this parallel tax system is always running in the background, the AMT greatly increases and complicates the recordkeeping, whether or not the corporation is currently exposed to the AMT. For example, there typically is different depreciation and a different basis in depreciable property for regular tax, AMTI, and ACE purposes. In addition, certain carryovers, such as foreign tax credits and net operating losses, will be different for regular tax and AMTI. In fact, a corporation that has net operating losses should regularly analyze their potential tax liabilities under the AMT. Finally, certain calculations for regular tax will have to be recalculated for AMTI (and ACE) based on differently treated items in the respective systems. For example, deductions based on income limitations, such as charitable contribution deductions, may be different for taxable income, AMTI, and ACE.

Some planning may help to limit the exposure to AMT but, most importantly, planning can take away the unpleasant surprise and will help to identify when a corporation can expect to be subject to the AMT.

< Older Post Newer Post >

Individual Year End Tax Planning

14 Dec, 2023

With year-end approaching, it is time to start thinking about moves that may help lower your tax bill for this year and next. This year’s planning is more challenging than usual due to changes made by the Inflation Reduction Act of 2022 and the SECURE 2.0 Act.

Business Year End Tax Planning

14 Dec, 2023

With year-end approaching, it is time to start thinking about moves that may help lower your business's taxes for this year and next.

Gifting to Charity While Paying Yourself? Yes, It's Possible

By Greg Dowell • 14 Nov, 2023

How to make doing good a little less frightening financially.

Corporate Transparency Act Creates Filing Requirements for Most Businesses in 2024

By Greg Dowell • 13 Nov, 2023

Catching many businesses by surprise, this Act kicks in with filing requirements as early as January 1, 2024.

Finding Employees - Coping in a Difficult Environment

By Greg Dowell • 05 Sep, 2023

Having a business fail for lack of employees was unheard of 10 years ago. The problem existed for many businesses long before the pandemic, but it certainly went to a whole new level from 2020 to the present.

Outsourcing the Accounting Department: Your Business Should Consider This Option Now

By Greg Dowell • 24 Aug, 2023

Improve profitability, reduce the opportunity for fraud, focus on your core business, eliminate excuses for tardy financial data - what's not to love about outsourcing your accounting?

ESOPs (Employee Stock Ownership Plans) Might Solve the Succession Puzzle

By Greg Dowell • 16 Aug, 2023

ESOPs have been around for years; they could be a solution for ownership transition.

Getting Married? What a Perfect Time to Talk About Taxes!

By Greg Dowell • 16 May, 2023

by Gregory S. Dowell Updated May 16, 2023 Spring is the traditional kick-off to wedding season, and thoughts quickly turn to the wedding venue, gifts, the happy couple, and, of course, the guest list. Lurking somewhere in the shadows, behind even that strange uncle you barely know, is another guest that needs to be considered: The tax impact on the newlyweds. To start, newlyweds will have two options for filing their income taxes in the year of marriage: Filing status can either be married filing jointly, or married filing separately. In the vast majority of cases, a couple will benefit with a lower overall tax burden to the couple by choosing to file married filing jointly. One of the classic cases where a couple may consider filing separately is when one spouse has significant amounts of medical expenses for the year. Medical expenses are only deductible if they exceed 7.5% of adjusted gross income; using only one spouse's income may allow a deduction to be taken if filing separately, compared to losing the medical deduction entirely if both incomes are combined by filing jointly. We previously had written about the tax trap that often occurs when two people get married, resulting often in an unanticipated balance due when the first joint tax return for the couple was filed. While President Trump’s Tax Cuts and Jobs Act (TCJA), changed the dynamics somewhat, it is still worthwhile to put pen to paper before saying “I do”. Prospective spouses have the opportunity to save money by taking income tax considerations into account before tying the knot. That’s particularly true for those who plan to marry late this year or early next year. As this article explains, from the federal income tax standpoint, some individuals marrying next year may come out ahead by either deferring or accelerating income, depending on their circumstances. Others may find it to their advantage to defer a year-end marriage until next year. For some quick background, a “marriage penalty” exists whenever the tax on a couple’s joint return is more than the combined taxes each spouse would pay if they weren’t married and each filed a single or head of household income tax return. Before President Trump’s TCJA, only the 10% and 15% married filing jointly brackets were set at twice that of the singles bracket, and so the marriage penalty effect on joint filers applied in the brackets above the 15% bracket. Beginning with the 2018 tax year, however, the TCJA set the statutory tax brackets for marrieds filing jointly-through the 32% bracket-at twice the amount of the corresponding tax brackets for singles. As a result, the TCJA eliminated any tax-bracket-generated marriage penalty effect for joint filers where each spouse has roughly the same amount of taxable income-through the 32% bracket. For example, if two individuals who each have $215,950 of taxable income file as single taxpayers for 2022, each would have a tax bill of $49,335.50, for a combined total of $98,671. If they were married, their tax bill as marrieds filing jointly would be $98,671, exactly the same amount as the combined total tax they’d pay as single taxpayers. Because the 35% bracket for marrieds filing jointly isn’t twice the amount of the singles 35% bracket, the marriage penalty effect will still apply to joint filers whose income falls in the 35% bracket. Using 2022 tax tables, two single taxpayers may each have $500,000 in taxable income, for a combined total of $1,000,000, without having any of it taxed higher than 35%. However, for marrieds filing jointly, the 35% tax bracket ends at $647,850 in taxable income, and each additional dollar of taxable income taxed at 37%. Thus, where two high-earning unmarried taxpayers with substantially equal amounts of taxable income are planning for their marriage to take place either late this year or early next, it may pay from the tax viewpoint to defer the marriage until next year. As an example, if two individuals each have $539,900 of taxable income file as single taxpayers for 2023, each would have a tax bill of $162,718, for a combined total of $325,436. If they were married before the end of the year, their tax bill as marrieds filing jointly would be $334,076, or $8,640 more than the combined total tax they’d pay as single taxpayers. If only one of the prospective spouses has substantial income, marriage and the filing of a joint return may save taxes, thus resulting in a marriage bonus. The bonus is the result of two factors: 1) the tax brackets for marrieds filing jointly cover wider spans of income than the tax brackets for taxpayers as singles; and 2) the taxable income of the lower-earning individual may not push the couple’s combined income into a higher tax bracket. In such a case, it will probably be better from the tax standpoint to accelerate the marriage into this year if feasible. There are a number of other factors that should also be taken into account when determining the effect of a marriage on income taxes of the couple. As mentioned early in this post, the first decision is to verify that filing a joint return is preferred to filing separate returns. In addition, many provisions of the tax code phase out completely (or decrease partially) as adjusted gross income increases. In a perfect world, there would only be good surprises for a newlywed couple following their wedding. To avoid any unpleasant income tax surprises, we always recommend that a newlywed couple take the time to make a projection of what their income will look like when combined as a couple, and determine what the tax bill will look like, at the Federal and State levels. After all, planning ahead, communicating with each other, discussing finances, and avoiding unpleasant surprises are some of the keys to a long marriage.