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Nicholas Fiore
Nicholas Fiore

A guide to the corporate alternative minimum tax (AMT)

Here’s an introduction to the adjustments and preferences corporations must make to their regular income tax to determine whether they are liable for the AMT.

August 28, 2014
by Nicholas Fiore, J.D.

A variety of exclusions, deductions, and credits are available to corporations, which often allow them to reduce the amount of tax that they are required to pay on the income they earn, sometimes to zero. To ensure that these corporations pay at least some tax on their income, Sec. 55 imposes an alternative minimum tax (AMT), which requires many corporations to add back some of these deductions and credits and pay tax on this reconfigured amount.

The calculation of a corporation’s AMT is parallel to its regular tax calculation. A corporation must calculate tax under both systems and determine its tentative minimum tax. Then the tentative minimum tax and the regular tax are compared. If the corporation’s tentative minimum tax amount exceeds its regular tax amount, the excess is the corporation’s alternative minimum tax, which it pays in addition to its regular tax. In other words, although the corporation ends up paying a total amount of tax equal to the tentative minimum tax, only the portion paid in excess of the regular tax is alternative minimum tax.

Small corporation exemption

Certain corporations are exempt from the AMT. Every corporation is exempt in the first tax year of its existence, regardless of its gross receipts for that year. A corporation is also exempt for all prior years (beginning after 1993) in which its annual gross receipts for the three-year period ending before the current tax year did not exceed $7.5 million ($5 million for a corporation’s first three-year period) (Sec. 55(e)(1)).

If a corporation that qualified for the small corporation exemption ceases to meet the gross receipts test, it becomes subject to the corporate AMT on a prospective basis, subject to certain modifications (Sec. 55(e)(2)).

Computing AMT

As noted, under Sec. 55(a), a corporation’s AMT is the excess of its tentative minimum tax for the tax year over its regular tax. The tentative minimum tax (Sec. 55(b)(1)) is 20% of its AMT income (AMTI) in excess of the corporate AMT exemption amount, reduced by any AMT foreign tax credit that may be claimed (Sec. 55(b)(1)(B)).

Under Sec. 55(b)(2), AMTI is taxable income, less income eligible for either the possessions tax credit or the Puerto Rico economic activity credit (Sec. 59(b)), plus or minus various adjustments and tax preferences. (Note: If a taxpayer’s regular tax is determined by reference to an amount other than taxable income (e.g., unrelated business taxable income for an exempt organization), that amount is used in determining AMTI (Sec. 55(b)(2) (flush language)).)

All provisions that apply in determining regular income also apply in determining AMTI (Regs. Sec. 1.55-1(a)).

Credit for prior-year minimum tax. A corporation may be able to take a minimum tax credit against its regular tax for AMT incurred in prior years.

Corporate AMT exemption amount

For corporations, the AMT exemption amount is $40,000, less 25% of AMTI over $150,000 (Secs. 55(d)(2) and (3)). Therefore, once a corporation’s AMTI reaches $310,000, its exemption amount is zero.

Adjustments and preferences

Calculating AMT involves examining both adjustments and preferences (Sec. 55(b)(2)). Adjustments involve substituting the AMT treatment of an item for the regular tax treatment of that item. Some (but not all) adjustments are negative amounts; that is, they may result in AMTI lower than taxable income.

Tax preferences under Sec. 57 involve the addition of the difference between the AMT treatment and the regular tax treatment of an item. Tax preferences cannot be negative amounts.

Some of the more significant adjustments and preferences include:

Depreciation adjustments. Under Sec. 56(a)(1), a corporation must refigure depreciation for:

  • Property placed in service after 1998 that, for regular tax purposes, was not depreciated using the 150% declining-balance method, switching to the straight-line method for the first tax year for which using it will yield a higher allowance (except for certain property for which straight-line depreciation is required);
  • Sec. 1250 property placed in service after 1998 that was not depreciated under the straight-line method; and
  • Tangible personal property placed in service after 1986 and before 1999.

The AMT adjustment (i.e., the amount added or subtracted in calculating AMTI) is determined by subtracting the amount of AMT depreciation for all property involved, from the depreciation amount claimed for regular tax purposes.

ACE adjustment. A corporation’s AMTI is increased by 75% of the amount by which its adjusted current earnings (ACE) exceed AMTI determined without regard to this adjustment or an AMT net operating loss (AMTNOL) deduction (Sec. 56(c)(1)). (This rule does not apply to S corporations, regulated investment companies, real estate investment trusts, and real estate mortgage investment conduits (Sec. 56(g)(6)).)

If AMTI exceeds the ACE amount, the corporation’s AMTI is reduced by 75% of the difference (limited to the aggregate amount of AMTI increases in earlier years over the aggregate amount of AMTI decreases) (Secs. 56(g)(2)).

Note: A corporation’s Sec. 199 domestic production activities deduction is deductible in computing its ACE—even though it is not deductible in computing the corporation’s earnings and profits for regular tax purposes.

Excess of percentage depletion over cost basis. Under Sec. 57(a)(1), the excess of the allowable depletion on each depletable asset over the property’s adjusted basis is a preference item that must be recalculated and added in when computing AMTI.

Adjustments to long-term contracts. In computing AMTI, taxpayers must use the percentage-of-completion accounting method for long-term contracts (other than home construction contracts) (Sec. 56(a)(3)).

AMTNOL deduction. A corporation deducts its AMTNOL instead of its regular tax NOL (Sec. 56(a)(4)). See also Secs. 56(d)(1) and (2).

In general, a corporation’s AMTNOL deduction is limited to 90% of AMTI, determined without regard to the AMTNOL deduction and any Sec. 199 deduction.

Adjusted gains and losses for some property. If a corporation disposed of certain properties for which it previously made AMT adjustments, the properties’ adjusted bases must be recalculated for AMT purposes, and the gains or losses from the dispositions must be redetermined (Sec. 56).

Other adjustments and preferences. Other adjustments and preferences that must be considered include:

  • A deduction for amortization of pollution control facilities (Sec. 56(a)(5));
  • Merchant marine capital construction funds (Sec. 56(c)(2));
  • Tax-exempt interest on certain private activity bonds (Sec. 57(a)(5)); and
  • The special deduction for Blue Cross/Blue Shield and similar organizations (Sec. 56(c)(3)).

Optional write-off for certain expenses. If a corporation elects to amortize certain qualified expenditures rather than deduct them currently, it will not need to make an AMT adjustment for these items, which include (Secs. 59(e)(1), 59(e)(6)):

  • Circulation expenditures that were deducted ratably over three years;
  • Mining exploration and development costs that were deducted ratably over 10 years;
  • Intangible drilling costs that were deducted ratably over 60 months.

If this election is made for an expenditure, it applies for regular tax purposes as well.

AMT foreign tax credit. Under Sec. 59(a), the AMT foreign tax credit (AMTFTC) must be recalculated for each separate limitation category specified on Form 1118, Foreign Tax Credit—Corporations.

Note: A corporation may elect to use a simplified Sec. 904 limitation to figure its AMTFTC (Sec. 59(a)(3)). However, the corporation must make this election for the first tax year after 1997 for which it claims an AMTFTC. If the corporation does not make the election for that tax year, it may not make this election at a later time. Once made, the election may be revoked only with the IRS’s consent.

Form 4626

Corporations must use Form 4626, Alternative Minimum Tax—Corporations, to compute the AMT.

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Nicholas Fiore, J.D., is an attorney with more than 30 years of tax editing and writing experience, primarily with The Tax Adviser. He has worked on the Uniform CPA Examination, written and edited both tax and nontax continuing education courses, and has provided tax and business information for a variety of audiences.