Corporate alternative minimum tax | CPA exam Regulation | Corporate Income Tax course

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These lectures cover corporate alternative minimum tax including ACE Adjustment, AMT Adjustments, AMT Preferences and Exemption Amount

Corporate Alternative Minimum Tax

Corporate Alternative Minimum Tax Preferences and ACE adjustment

CORPORATE ALTERNATIVE MINIMUM TAX The AMT computations for C corporations are similar to those for noncorporate tax- payers. However, there are several important differences:

• The corporate AMT rate is 20 percent, instead of rates of 26 and 28 percent that are used by noncorporate taxpayers.

• The AMT exemption for corporations is not indexed for inflation. The exemption is $40,000 reduced by 25 percent of the amount by which AMTI exceeds $150,000.52

• Many of the adjustments and preferences applicable to individual taxpayers are computed and used in the same way by corporate taxpayers.

AMT and Small Corporations

Two provisions exist that allow small C corporations to avoid the AMT. For these provisions, a corporation is classified as a small corporation based on the amount of its annual gross receipts. In its first tax year of existence, a corporation automatically is classified as a small corporation; thus, a corporation is not subject to AMT in its first year of existence.53 For each succeeding tax year, the prior year’s average annual gross receipts must be less than a certain threshold for the corporation to continue to be exempt from AMT. In its second year of operations, if a corporation’s annual average gross receipts in the prior year were less than $5 million, the corporation is not subject to AMT. For the third year and thereafter, if the corporation’s average annual gross receipts for the three-year period ending before the current tax year do not exceed $7.5 million, the corporation continues to be exempt from AMT. However, if a corporation ever fails the gross receipts test, it is ineligible for small corporation classification in any future tax year.

AMT Adjustments

The following adjustments that were discussed in connection with the individual AMT also apply to the corporate AMT calculation. As we have seen, adjustments usually relate to timing differences between regular taxable income and AMTI.

• Excess of MACRS over AMT depreciation on real and personal property placed in service after 1986.

• Pollution control facilities place din service after 1986.

• Mine and exploration expenditures.

• Income from long term contracts.

• Adjusted gain or loss on the dispositions of assets.

• An NOL deduction is available, but any allowable ATNOLD cannot exceed 90 percent of AMTI (before deduction for ATNOLD).

ACE Adjustment

The adjusted current earnings (ACE) adjustment applies only to C corporations.56 The can have a significant effect on both tax and financial accounting.57 This adjustment is intended to bring AMTI to approximate a corporation’s economic income and, as a result, the entity’s true tax-paying ability. Thus, the ACE adjustment is intended to limit the benefits of certain tax provisions that the other adjustments, by their nature, cannot limit. The corporation arrives at ACE by making additional adjustments to AMTI. Generally, these adjustments include additional income items, eliminate certain deductions, accelerate income recognition, and defer selected deductions. Using the ACE amount, the taxpayer then computes the ACE adjustment.

AMT Preferences

A C corporation’s AMTI includes designated tax preference items. In some cases, this has the effect of subjecting nontaxable income to the AMT. Tax preference items that apply to individuals also are required in computing AMTI for corporations.

Exemption Amount

C corporation’s tentative minimum tax (TMT) is computed as 20 percent of its AMTI that exceeds the AMT exemption. The exemption amount for a corporation is $40,000 reduced by 25 percent of the amount by which AMTI exceeds $150,000.60 The corpo- rate AMT exemption phases out to zero when AMTI reaches $310,000. No part of the corporate AMT exemption is indexed for inflation.