ChapterChapter55

Other Corporate Tax LeviesOther Corporate Tax Levies

Alternative Minimum TaxAlternative Minimum Tax

Overview

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What is the AMT?What is the AMT?

Alternative income tax system running parallel to the regular income tax systemGenerally has a broader base, lower tax rates

Objective of the AMT:To ensure taxpayers with substantial economic incomes pay some minimum amount of income tax (despite the lawful use of tax incentives)

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Small CorporationsSmall Corporations

Small corporation exemption [IRC §55(e)]- Average annual gross receipts for prior 3 years less than $7.5 million - Controlled groups are aggregated- Special rules for initial years

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AMT OverviewAMT Overview

Regular taxable income+ NOL carryforward deducted (if any)+ Tax preferences (if any)+/- AMT adjustments other than ACE (if any) AMTI before ACE adjustment+/-ACE adjustment (if any) AMTI before AMT NOL deduction- AMT NOL deduction (if any)= Alternative Minimum Taxable Income (AMTI)

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AMT OverviewAMT Overview

Alternative Minimum Taxable Income (AMTI)- AMT exemption= Taxable excessX 20%Tentative Minimum Tax

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AMT OverviewAMT Overview

[IRC §55(a)] If Tentative Minimum Tax > Regular tax before credits (except FTC), then AMT payable equals the excessRegular tax is before credits except foreign tax

credits [IRC §55(c) and §26(b)]

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AMT CreditAMT Credit

[IRC §53] When Tentative Minimum Tax < regular tax, an AMT credit is allowed as a reduction of regular taxes payable

The AMT credit is limited to the lesser of:Regular tax less the tentative minimum tax orThe sum of AMT paid in all prior years less the

sum of AMT credits claimed in prior years

Examples 1, 2, and 3

Alternative Minimum TaxAlternative Minimum Tax

Tax Preferences and

AMT Adjustments

(other than the ACE adjustment)

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AMT Tax PreferencesAMT Tax Preferences

Tax preferences are always positiveInterest income from private activity bonds

issued after August 8, 1986 [IRC §57(a)(5)]Excess percentage depletion from oil and

gas wells [IRC §57(a)(1)]Excess intangible drilling costs from oil,

gas, etc. properties [IRC §57(a)(2)]

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AMT AdjustmentsAMT Adjustments

Depreciation: Real property placed in service after 1986 and

before 1999 [IRC §56(a)(1)]Tangible personal property placed in service

after 1986 and before 2005 [IRC §56(a)(1)]

AMT basis in excess of regular tax basis for

property dispositions [IRC §56(a)(6)]

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AMT AdjustmentsAMT Adjustments

Long-term contracts must use percentage of completion for AMT [IRC §56(a)(3)]

Loss limitations must be recalculatedU.S. production activities deduction must

be recalculated [IRC §199(d)(6)]

Alternative Minimum TaxAlternative Minimum Tax

The ACE Adjustment

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Adjusted Current EarningsAdjusted Current Earnings

Adjusted current earnings [IRC §56(g)] AMTI before ACE adjustment/ Adjustments for computing ACE = Adjusted current earnings (ACE)

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Adjusted Current EarningsAdjusted Current Earnings

Adjustments for ACE [IRC §56(g)(4)]: (+) Tax-exempt interest income (excluding PAB

interest income that is a tax preference)(-) Disallowed expenses and interest allocable

to tax-exempt income (+) Proceeds from key-man life insurance (-) Premiums paid on key-man life insurance (+) 70% DRD actually deducted(+/-) LIFO inventory method not allowed

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Adjusted Current EarningsAdjusted Current Earnings

Adjustments for ACE [IRC §56(g)(4)]: (+/-) Depreciation on assets placed in

service 1/1/90 through 12/31/93(-) Ace basis in excess of AMT basis for

property dispositions of assets above(+) Amortization of organizational costs

incurred after 1989(+/-) Installment method not allowed

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ACE AdjustmentACE Adjustment

[IRC §56(g)(1)] If the Adjusted Current Earnings (ACE) exceed the pre-ACE adjustment AMTI, then the positive ACE adjustment equals: 75% * (ACE less pre-ACE adj. AMTI)

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ACE Adjustment – Example 1ACE Adjustment – Example 1

Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $130,000No AMT NOL carryforward

Then the ACE adjustment = 75% x (130,000 – 100,000) = $22,500

So, AMTI = 100,000 + 22,500 = $122,500

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ACE AdjustmentACE Adjustment

[IRC §56(g)(2)] If the Adjusted Current Earnings (ACE) are less than the pre-ACE adjustment AMTI, then the negative ACE adjustment equals the lesser of: 75% * (Pre-ACE adj. AMTI less ACE) orThe sum of positive ACE adjustments in all

prior years over the sum of negative ACE adjustments in all prior years

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ACE Adjustment – Example 2ACE Adjustment – Example 2

Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $80,000Sum of all prior year ACE adj.s = $25,000No AMT NOL carryforward

Then the ACE adjustment = 75% x (80,000 – 100,000) = ($15,000)

So, AMTI = 100,000 + (15,000) = $85,000

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ACE Adjustment – Example 3ACE Adjustment – Example 3

Assume:AMTI before the ACE adjustment = $100,000Adjusted current earnings (ACE) = $80,000Sum of all prior year ACE adj.s = $12,000No AMT NOL carryforward

Then the ACE adjustment = 75% x (80,000 – 100,000) = ($15,000) Limited to ($12,000)

So, AMTI = 100,000 + (12,000) = $88,000

Alternative Minimum TaxAlternative Minimum Tax

AMT NOL Deduction

and

AMT Exemption

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AMT NOL DeductionAMT NOL Deduction

[IRC §56(a)(4) and (d)(2)] NOL carryover is determined after all AMT adjustments in the year originated[IRC §56(d)(1)] Limited to 90% of AMTI

before the NOL deduction

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AMT ExemptionAMT Exemption

Exemption [IRC §55(d)]Exemption amount is $40,000Phase-out of exemption amount:

25% * (AMTI - 150,000)Exemption cannot go below zero! (Fully

phased-out at AMTI of $310,000 or more)

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AMT Exemption – ExamplesAMT Exemption – Examples

What is the exemption for a corporation with AMTI of $101,500?$40,000, AMTI < $150,000 (no phase-out)

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AMT Exemption – ExamplesAMT Exemption – Examples

What is the exemption for a corporation with AMTI of $193,000?40,000–25%(193,000–150,000)= $29,250

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AMT Exemption – ExamplesAMT Exemption – Examples

What is the exemption for a corporation with AMTI of $350,000?$0, AMTI > $310,000 (fully phased-out)

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AMT ExamplesAMT Examples

Examples 4, 5, and 6Problems: C5-36, C5-40, C5-48