How is the alternative minimum tax calculated

Andrew B. Lyon

PricewaterhouseCoopers LLP

A complex tax (either federal or state) designed to increase the income tax on businesses that the legislature believes pay too little relative to "standard" rules of taxation.

Minimum taxes are intended to increase tax payments from taxpayers who, under the rules of the regular tax system, are believed to pay too little tax relative to a more standard measure of their income. The U.S. federal income tax has both a personal and a corporate alternative minimum tax (AMT). Standard rules of business income taxation call for the recognition of income as it accrues, that is, at its receipt or when all events have occurred that fix the right to receive the income, whichever comes first. Deductions are permitted only when definite liabilities have been incurred. These standard rules are strongly influenced by (but differ somewhat from) both financial accounting practices and economic principles of income measurement. (Note that both standard rules and regular tax rules depart from economic measures of income by not allowing a deduction for the opportunity cost of equity-financed capital. The standard rules, as embodied in the AMT, additionally depart from economic principles by making little or no attempt to adjust measured income for the effects of inflation. The regular tax system gives some consideration for inflation through accelerated depreciation for equipment and valuation rules for inventory.)

Rules of the regular tax system make many departures from the standard rules, in a manner that generally results in a lower measure of income. The motives for these departures - or tax preferences - may include an aim for simplicity, an incentive for certain activities, political influence, or better accounting for other economic factors, such as inflation.

Corporate and individual minimum taxes were first put into the U.S. tax code in 1969. Initially, the minimum tax functioned much like an excise tax on specified tax preferences in excess of some fixed amount. As part of the Tax Reform Act of 1986, the corporate minimum tax was significantly modified to cover a broader range of preferences and is now called the alternative minimum tax. It is an alternative tax because the rules for this minimum tax constitute a complete, alternative set of rules to the regular tax system. It is a minimum tax because a corporation must pay the larger of its AMT or its regular tax liabilities.

AMT calculation

The AMT has its own rules for the measurement of income and deductions, and it has separate tax rates. While closely following the rules of the regular system, the AMT has a broader definition of income and a less generous set of deductions. Further, most business tax credits, such as the credit for research and experimentation, cannot be used to reduce tax payments under the AMT.

Given the larger measure of taxable net income under the AMT, practically all corporations would pay AMT were it not for the fact that the tax rate under the AMT is lower than the maximum tax rate under the regular tax system. The tax rate under the AMT is 20 percent, while the top tax rate under the regular tax system is 35 percent. Because the regular tax rate is 75 percent higher than the AMT rate, a firm’s income must be at least 75 percent greater under the AMT before it must make payments under this system. It might at first appear that such a significant percentage change in net income would require that the AMT use tremendously different measures of includable income or allowable deductions relative to the regular tax system. But for the typical manufacturing firm, gross receipts and deductions are 10 to 20 times larger than its net income. A 5 to 10 percent change in includable receipts or allowable deductions is sufficient to create an AMT liability.

The starting point for the determination of income for AMT purposes is the corporation’s regular taxable income. Regular taxable income is modified by a series of additional computations, termed adjustments and preferences. Adjustments can either increase or decrease taxable income, whereas preferences are calculated on a property-by-property basis and only enter to the extent that they are positive. Adjustments include a portion of accelerated depreciation on buildings and equipment, amortization of pollution control facilities, mining exploration and development expenses, income reported under the completed contract method of accounting, and installment sales income.

Preferences include percentage depletion, intangible drilling costs, bad debt deductions of financial institutions, and interest on certain bonds that would otherwise be tax exempt. Between 1987 and 1989, an additional preference was one-half the amount by which a corporation’s book income (with certain modifications) exceeded its taxable income for AMT purposes. This preference was enacted as an explicitly temporary measure and was replaced in 1990 with an alternative measure of income, adjusted current earnings. Since 1990, 75 percent of the difference between adjusted current earnings and the firm’s taxable income for AMT purposes is included in income.

AMT is calculated by applying the 20 percent tax rate tothe AMT measure of income. The resulting amount of tax may be reduced by foreign tax credits, although the credits are calculated using AMT rules. (Under current law, net operating losses may not reduce tentative minimum tax by more than 90 percent. Until recently, this rule also applied to foreign tax credits, but this limit was repealed by the 2004 corporate tax legislation.) After subtracting foreign tax credits, the tentative minimum tax is compared to the firm’s regular tax liability before all credits except the foreign tax Alternative minimum tax, corporate credit. If the tentative minimum tax is larger, the firm pays the excess as AMT, in addition to its regular tax liability. If the firm’s regular tax liability exceeds its tentative minimum tax, it may further reduce its regular tax by allowable business credits, but generally not below its tentative minimum tax. For firms with large amounts of business credits, such as the credit for research and experimentation, the AMT may serve

to increase the firm’s tax liability by delaying the use of these credits even if the firm pays no AMT.

A major element of the increase in tax liability under the AMT involves differences in the timing of deductions. Because firms may switch between the AMT and the regular tax, a system of credits for taxes paid under the AMT and adjustments to the basis of depreciated property is needed to prevent the AMT from collecting taxes in excess of the value of the timing preference. The tax credit for AMT payments can only be used to offset future regular tax liability. Further, it may not be used to reduce regular tax payments below the tentative minimum tax (the same floor that limits the use of most business tax credits). A firm that pays AMT and eventually claims all of its AMT credits will have the same total tax liability over this period as it would have had in the absence of the AMT. Because the AMT credits are taken at a later date than the firm’s AMT payments, however, the AMT has accelerated the tax payments. The cost to the firm of this acceleration is the forgone earnings on these funds. If a firm must wait a long time before claiming its AMT credits, this cost may be a sizable fraction of the AMT payment. Calculations indicate that firms undertaking investment in equipment while temporarily subject to the AMT generally face a higher cost of capital than firms on the regular tax (Lyon 1990). Interestingly, firms that are presently on the regular tax and are anticipating a short period of AMT liability in the future may face increased investment incentives as a result of the tax.

AMT revenues

As shown in the table, between 1987 and 2001, AMT revenues ranged from a high of $8.1 billion (1990) to a low of $1.8 billion (2001), corresponding to between 8.4 percent and 1.1 percent of total corporate income tax receipts after credits. AMT credits claimed over this period were about 60 percent of the AMT paid. Between 1995 and 2001, AMT credits claimed have exceeded payments of AMT, resulting in a negative net direct contribution to corporate tax revenues. Additional tax revenue is raised indirectly from the AMT from its limitation on general business credits.

Firms paying AMT represented only 1 to 2 percent of all corporations. AMT incidence was much more likely, however, for larger firms. Since 1987, approximately 20 to 40 percent of all corporate assets have been held by firms paying AMT (or firms that had credit use denied due to AMT) (Lyon 1997; Carlson 2001). Beginning in 1998, smaller corporations have been exempted from the AMT.

Recent legislation has reduced the incidence of the AMT to some degree. Effective for investments in 1999, equipment is depreciated over the same recovery periods for AMT and regular tax purposes, although the method of recovery for most equipment under the regular tax (double declining balance) remains more accelerated than under the AMT (150 percent declining balance). Moreover, temporary "bonus depreciation" provisions for equipment, in effect for 2001 to 2004, applied under the AMT and no depreciation adjustments were required for such property.

Why an AMT?

The existence of the minimum tax appears to be an inconsistency in the formulation of tax law. One part of the tax system gives special deductions, exclusions, and incentives, and another part of the tax system takes them away (Graetz and Sunley 1988). Why, then, a minimum tax?

Some analysts believe the minimum tax is an appropriate "second-best" method to reduce the magnitude of deviations from economic measures of income if political constraints prevent their direct elimination. Corporations for which income measured under the minimum tax differs greatly from income measured under the regular tax are likely to pay minimum tax. Taxable income under the minimum tax, however, is not the same as economic income.

Further, because a firm undertaking a tax-preferred activity can still avoid the minimum tax if the firm additionally undertakes other activities without such preferences, taxpreferred activities will still attract investment. If one desires, for reasons of efficiency, to limit the amount of the economy’s resources devoted to a given tax-preferred activity, the minimum tax will not be as effective as a direct reduction in the tax preference for that activity.

Others argue that the minimum tax does just what it is supposed to do. It allows tax policy to meet two social objectives: providing tax incentives to encourage particular activities and ensuring, for reasons of fairness, that corporations with positive incomes pay at least some tax. Of course, corporate taxes are ultimately borne by people, and the fact that a given corporation pays a low rate of tax may not have implications for equity among individuals.

If the fairness concern is that individuals who earn income from certain corporate activities pay too little tax on this income, this directly conflicts with the assumed objective of encouraging the activity through a tax preference.


  • Avi-Yonah, Reuven. "The Case for Retaining the Corporate AMT." SMU Law Review 56 (Winter 2003): 333-42.
  • Carlson, Curtis. "Who Pays the Corporate Alternative Minimum Tax? Results from Corporate Panel Data for 1987-1998." In Proceedings of the Ninety-Fourth Annual Conference on Taxation. edited by Sally Wallace (349-56). Washington, DC: National Tax Association, 2001.
  • Chorvat, Terence R. and Michael S. Knoll. "The Case for Repealing the Corporate Alternative Minimum Tax." SMU Law Review 56 (Winter 2003): 305-32. Graetz, Michael J. and Emil M. Sunley. "Minimum Taxes and Comprehensive Tax Reform." In Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax. edited by Henry J. Aaron, Harvey Galper, and Joseph Pechman (285-419). Washington, DC: The Brookings Institution, 1988.
  • Lyon, Andrew B. Cracking the Code: Making Sense of the Corporate Alternative Minimum Tax. Washington, DC: The Brookings Institution, 1997.
  • ---. "Investment Incentives under the Alternative Minimum Tax." National Tax Journal 43 (December 1990): 451-65.


Category: Taxes

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