Topic 3: C Corporations – Alternative Minimum Tax
[IRS Materials: Publication 542 and Form 1120 Instructions]
B. Corporate Alternative Minimum Tax Computations
1. The Corporate AMT Formula – The corporate AMT may be best discussed with reference to a comprehensive example. Figure 2 presents the basis regular tax facts for a corporate taxpayer, and Figure 3 recasts the facts for the AMT.
2. Review these exhibits carefully to obtain an overview of the AMT computation.
3. Note that since the format starts with taxable income, adjustments are made for any differences between regular tax and AMT treatments of specific items.
4. The corporate AMT formula may be expressed as follows:
5. Regular Taxable Income - This is the taxable income figure reflected as regular tax liability on the front of Form 1120.
6. Tax Preferences - These items are holdovers from the add-on minimum tax computations; these amounts can only be positive (negative amounts are ignored). The principal items of tax preference are the following:
- Tax Exempt Interest on Certain Private Activity Bonds - Although exempt for regular tax purposes, interest on certain private activity bonds issued after 8/1/86 (such as certain industrial development bonds) is taxable for purposes of the AMT.
- Excess Percentage Depletion - Percentage (statutory) depletion for natural resources may go beyond total cost recovery. Any percentage depletion in excess of total cost recovery during the current year is reported as a positive preference item in the AMT computation.
7. Adjustments Other Than the ACE Adjustment - Adjustments were added to the AMT computation in 1986, and these may be either positive or negative, since a number of the adjustments relate to the timing of income or deduction. The most common adjustments include the following:
- MACRS Cost Recovery Deductions - The difference between the regular tax MACRS deduction and the AMT cost recovery deduction for post-86 MACRS assets is a positive or negative adjustment. Recall that for purposes of the AMT, personalty uses 150% recovery over the MACRS life and realty uses the normal MACRS straight-line life ( ADS class life is used for assets placed in service prior to 1999 with certain exceptions). Also recall that Sec. 179 expensing election is allowed for AMT.
- Property Transaction Gain or Loss Adjustment - Since different cost recovery methods are used for regular tax and AMT purposes, such assets have different adjusted bases and different gain/loss amounts upon disposition. The difference in the gain/loss recognized upon disposition is reported as a positive or negative adjustment. Usually this adjustment is negative, since the regular tax gain will usually exceed the AMT gain due to faster depreciation write-offs.
- Expense Adjustments - In certain cases, income that was exempt from regular taxable income must be included in alternative minimum taxable income; an example is the interest on certain private activity bonds mentioned above. In these cases, any expenses related to producing this income will be deductible for AMT purposes, even though such items are not deductible for regular tax purposes. An example would be interest expense incurred on a loan to purchase private activity bonds.
- Long-term Construction Contracts - Although the percentage of completion method must generally be used for reporting income from long-term construction contracts for regular tax purposes, certain taxpayers may still use the old completed contract method. Taxpayers covered by these exceptions may not use such a method for the AMT, however; the percentage of completion method is always required for the AMT. Thus, positive or negative adjustments must be made for those taxpayers not using the percentage
of completion method for long-term contracts. The adjustment is for the difference between income reportable in the current year under their regular tax method and the income that would be reportable under the percentage of completion method.
8. Tentative AMTI Before the ACE Adjustment - This is the amount of adjusted income subject to the alternative minimum tax before considering the ACE adjustment and the exemption deduction.
9. ACE Adjustment - One of the objectives of the AMT is to force corporations that show large income to shareholders and/or creditors and little income on their tax return to pay a minimum amount of tax each year. In order to prevent the corporation from “having the cake and eating it too,” a special adjustment is made for 75% of the excess of “adjusted current earnings” over alternative minimum taxable income (AMTI). As a shortcut, the ACE adjustment is simply 75% of any applicable ACE adjustments, since AMTI is both added and subtracted to these adjustments in determining ACE.
10. Adjusted current earnings represent AMTI plus or minus certain adjustments designed to convert AMTI to a number more representative of the corporation’s economic income. The principal ACE adjustments are illustrated in Figure 3. Because the examiners have not yet tested on the topic, just briefly review these items for a sense of the types of adjustments made for ACE purposes.
Tip - When totaling the various ACE adjustments, it is possible that the final ACE adjustment will be negative. This negative adjustment is allowed as a reduction in AMTI only to the extent of the excess of any previous cumulative positive ACE adjustments over previous cumulative negative ACE adjustments. Any amount not allowed as a deduction because of this limitation is lost forever.
Example - In 2008 Bee Corporation’s ACE adjustment is a negative $55,000. In prior years, Bee had reported $48,000 positive ACE adjustments and $31,000 negative ACE adjustments. Bee may report a negative ACE adjustment of $17,000 on its 2008 return ($48,000 - $31,000); the remaining $38,000 of negative ACE adjustments is simply lost forever.
11. AMT Net Operating Loss Deduction Adjustment - Recall that the AMT NOL deduction cannot exceed 90% of AMTI; if this is the case, a positive adjustment must be made for the amount of the NOL deducted in determining regular taxable income that is not allowed for AMT purposes.
12. AMT Exemption - Every corporate taxpayer is allowed an initial exemption from the AMT of$40,000 ; however, this exemption is phased out $.25 on the dollar for each dollar of AMTI exceeding $150,000. Thus, a corporation with AMTI of $210,000 will have an exemption of $25,000, or $40,000 less 25% of ($210,000 - $150,000). Note that at $310,000 or more of AMTI, a corporation has no exemption deduction.
13. AMT Rate - The AMT rate is a flat 20% rate applicable to all AMTI.
14. Foreign Tax Credit - The only tax credit allowed against the tentative minimum tax is the foreign tax credit. Recall that this credit is allowed in full, and is no longer limited to 90% of the tentative minimum tax liability before considering the credit.
15. Tentative Minimum Tax (TMT) - This is the alternative tax computation to be compared to the corporation’s regular tax liability.
16. Alternative Minimum Tax - This is the excess of TMT over the regular tax liability (RTL) of the corporation. Any excess is then added to RTL when filing the Form 1120. This amount is also the “AMT credit” that is carried forward to the next year to offset any excess of RTL over TMT in the carryover year (see discussion below).