paystubmakr.com presents. Unincorporated Associations Part III Alternative Minimum Tax
Before TRA ‘86, corporations could be subjected to the add-on minimum tax. The tax was imposed at 15% of the amount by which tax preference items exceeded $10,000 or the regular corporate tax liability for the year, whichever was greater. TRA ‘86 repealed the add-on minimum tax and replaced it with the Alternative Minimum Tax (AMT). The tax is similar to the AMT which is imposed on individuals. The current AMT rate is 20% of Alternative Minimum Taxable Income (AMTI) that is more than the exemption amount of $40,000. This exemption amount is reduced by 25% of the amount by which AMTI exceeds $150,000 with the result that when AMTI reaches $310,000, the benefit of the exemption amount is lost.
Alternative minimum taxable income is computed as follows:
Regular Taxable Income (before NOL deduction)
Plus or Minus
AMT Adjustments Under §56
Tax Preferences Under §57
Alternative Minimum Taxable Income (AMTI) before AMT NOL Deduction
AMT NOL deduction (limited to 90%)
Alternative Minimum Taxable Income (AMTI)
Alternative Minimum Tax Base
Multiplied by 20% (26% to 28% for individuals) Equals
AMT before AMT Foreign Tax Credit
AMT Foreign Tax Credit (possibly limited to 90%)
Tentative minimum tax
Regular Tax Liability before Credits minus Regular Foreign Tax Credit
Alternative Minimum Tax (§55(a); §55(b))
Regular Tax Deduction – §55(c)
Quote from “SMALL BUSINESS TAX CUT ACT” “A corporation is subject to an alternative minimum tax that is payable, in addition to all other tax liabilities, to the extent that it exceeds the corporation’s regular income tax liability.”
Thus, in the calculation of alternative minimum tax, “regular tax” is deducted from “tentative minimum tax.” The regular tax is the regular tax liability that is used for determining the limitation on various nonrefundable credits reduced by the regular (as opposed to the alternative minimum tax) foreign tax credit and without including:
(1) The 5-year and 10-year averaging taxes on lump sum distributions from
qualified retirement plan;
(2) Any investment credit recapture; or
(3) Any recapture of the low-income housing credit. If a corporation pays the alternative minimum tax, the amount of the tax paid is allowed as a credit for the tax in future years.
Tax Preferences & Adjustments Alternative minimum taxable income is the corporation’s taxable income increased by the corporation’s tax preferences and:
“adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Any item that is treated.”
differently for alternative tax purposes than it is for regular tax purposes is Termed a tax preference (§57) or an adjustment (§56; §55(b)(2)(A)). Adjustments
involve a substitution of a special AMT treatment of an item from the regular tax
treatment, while a preference involves the addition of the difference between the special AMT treatment and the regular tax treatment.
Some adjustments can be negative (i.e., they result in alternative minimum taxable income that is less than taxable income). Tax preferences cannot be negative amounts. Some tax preferences and adjustments only apply to certain types of taxpayers.
Preferences & Adjustments for All Taxpayers
Note: The TRA ‘97 has made regular and AMT depreciation the same in
Pollution Control Facilities
Incentive Stock Options
Intangible Drilling Costs
1-27Tax Exempt Interest
Appreciated Charitable Contribution Property
Financial Institutions’ Bad Debts
Alternative Tax Net Operating Loss Deduction
Adjusted Basis of Certain Property
Preferences & Adjustments for Noncorporate Taxpayers & Some Corpo-
Preferences & Adjustments for Corporations Only
Untaxed Book Income
Earnings & Profits
Blue Cross/Blue Shield Deduction
Merchant Marine Capital Construction Fund
Adjustments – §56
As the AMT formula shows, taxable income is increased by positive adjustments and decreased by negative adjustments. Most positive adjustments arise because of timing differences between the AMT and the regular tax related to deferral of income or acceleration of deductions. When these timing differences reverse, negative adjustments are made.
There are other adjustments that are based on permanent differences between the AMT and the regular tax. These adjustments are similar to preferences and are always positive.
Business Untaxed Reported Profits (Pre-1990)
An additional positive adjustment is included in determining AMTI for those corporations whose taxable income differs from income used for financial accounting purposes. For 1987 through 1989, one-half of the excess of pretax adjusted net book income over AMTI was a positive adjustment. Adjusted net book income refers to the net income or loss as shown on the taxpayer’s applicable financial statements, subject to several adjustments (§56(f)(2)(A) & Temp. Reg. §1.56-IT(b)(2)(i)). This business untaxed reported profits adjustment is treated as a timing adjustment even if it clearly related to a permanent exclusion. Since the business untaxed reported profits adjustment cannot be negative, AMTI is not reduced where adjusted net book income is less than AMTI.
In determining adjusted net book income, the following order of priority was used:
(1) Financial statements filed with the Securities and Exchange Commission,
(2) Certified audited financial statements prepared for nontax purposes,
(3) Financial statements that must be filed with any Federal or other governmental agency,
(4) Financial statements used for credit purposes,
(5) Financial statements provided to shareholders,
(6) Financial statements used for other substantial non-tax purposes, and
(7) The corporation’s earnings and profits for the year.
After 1989, the use of pretax book income was replaced by a concept based on adjusted earnings and profits. However, even prior to 1990, corporations had to use current adjusted earnings and profits in determining business untaxed reported profits if it did not have any of the statements listed in 1 through 6 above.