A few days ago, this blog addressed the Alternative Minimum Tax (AMT) as it applies to individuals. A little known fact is that businesses, like individuals, can be subject to the AMT. Although the purpose is the same - assure that taxpayers with certain types of income and deduction structures pay at least a minimum amount of tax - the way in arriving at the AMT is slightly different. This article addresses AMT as it applies to tax-paying corporations (C Corps). It does not apply to passthrough entities such as S Corps or Partnerships, because AMT is calculated at the individual level.
Not all businesses are alike
Unlike individuals, some corporations are exempt from the AMT. A corporation that qualifies as a "small corporation" is exempt from the AMT. To be classified as a small corporation, the entity must:
- Be in its first year of existence, i.e. the current tax year is the year the entity began operations, or
- The company was treated as a small corporation for all prior tax years beginning after 1997, and
- The company's gross receipts did not exceed an average of $7.5 million for the preceding 3 tax years ($5 million if the entity has been in existence for 3 years or less)
After determining that the corporation is subject to the AMT, the taxpayer will complete Form 4626 with the Form 1120. Form 4626 is organized similar to Form 6251 for individuals. It begins with the corporation's taxable income, and then adds back / takes away various adjustments and preferences, such as:
- Differences in depreciation
- Differences in gains and losses
- Depletion
- Intangible drilling costs
- Adjusted Current Earnings adjustments (ACE)
After the corporation accounts for these adjustments and preferences, they arrive at their alternative minimum taxable income (AMTI). Corporations are afforded an exemption if their income falls in a certain range, typically $40,000. The AMTI is then multiplied by 20% to arrive at the AMT.
Just like individuals, if the AMT exceeds the corporation's regular tax, then they must pay the higher amount.
Because corporation's do not receive the same preferential treatment of gains being taxed at a lower rate like individuals, the biggest factor in a corporation's AMT calculation is depreciation. A corporation needs to be mindful when capitalizing depreciable property that a large difference between the tax and AMT depreciation methods could subject the corporation to a higher tax rate. Some assets, when capitalized using the 200% double-declining method of depreciation can only be depreciated using the 150% MACRS method for AMT purposes. This will cause the AMT depreciation expense to be lower than the tax depreciation, resulting in an addition to taxable income in arriving at AMTI.