BGBC Partners, LLP Tax Update: The “C” Corporation Alternative Minimum Tax
If you operate your business as a “C” corporation, did you know that you may be subject to another tax regime known as the corporate alternative minimum tax (“AMT”)? Well, if you didn’t, we are going to introduce you to it in this week’s Tax Update.
Like the individual AMT, the “C” corporation AMT is designed to reduce a taxpayer's ability to avoid taxes by using certain deductions and other tax benefit items (Please note that this doesn’t apply to “S corporations”). It does this by applying to a more comprehensive base than the regular income tax, and by limiting the extent to which net operating loss carryovers and tax credits can be used to reduce taxes.
The “C” corporation AMT is a separate and independent tax that is parallel to the “regular” corporate income tax. The tax, at a rate of 20%, is imposed on alternative minimum taxable income (“AMTI”), but only to the extent AMTI exceeds an exemption amount of $40,000 reduced by 25% of the amount by which AMTI exceeds $150,000.
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 generates a minimum tax credit for any AMT paid. This credit is used against regular tax (but limited by AMT) where the taxpayer is paying regular tax. Thus, 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 don't 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.
The AMT greatly increases and complicates the recordkeeping which is necessary for preparing returns and determining tax. For example, there may be different depreciation (and hence 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. Finally, certain calculations for regular tax should 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.
The need to keep these detailed records exists even if the taxpayer does not currently pay AMT, since the taxpayer may be in an AMT position in the future. Also, AMT must be calculated to determine the amount of general business credits that can be used.
Your CPA can assist you in maintaining the necessary records to cope with the AMT, and can go into greater detail as to how the AMT would affect your particular tax situation.
