The media has vilified the alternative minimum tax (AMT) for sneaking up on unsuspecting individual taxpayers. But there’s a similar tax evil for business entities lurking in the weeds.
Strategy: Watch out for the corporate AMT. It’s not as well-known as its notorious cousin, the individual AMT, but the results can be just as devastating to a corporate taxpayer.
Get a grip on the key tax rules in this area. Significantly, you may qualify for a special exception for small corporations if your company’s income took a nosedive last year. On the other hand, if you can’t squeeze through this tax loophole, you’ll have to meet the AMT head-on when you file your 2014 return.
Here’s the whole story: The corporate AMT generally applies to a wider spectrum of income with fewer deductions than the individual AMT. Like the individual AMT, you must pay the corporate AMT if your “tentative tax” calculation is higher than your regular tax liability. The tax rate on corporate AMT income is 20%.
However, the corporate AMT doesn’t apply if your average gross receipts for the three prior years is $7.5 million or less. This figure is reduced to $5 million for the first three-year period of operation. New corporations are exempt.
The corporate AMT often turns into a timing exercise because companies can take an AMT credit against regular taxes in future years.
Example: Say your company’s AMT credit carried over from the 2014 tax year is $1 million. If the company owes $1.5 million in regular income tax this year and has no AMT liability, it can reduce its tax bill by $1 million. Therefore, it has to pay only $500,000 in tax for 2015.
But there’s a catch: The firm can’t reduce its regular income tax below the AMT floor. For instance, if the tentative AMT tax is $1.25 million, it can use only $250,000 of the AMT credit from 2014 ($1.5 million – $1.25 million). The remaining credit may be used in subsequent years.
Because the tax law provisions in this area are extremely complex, it’s easy to bungle the AMT credit or otherwise miscalculate your company’s liability, especially if you’re not a tax pro and you handle your own corporate returns.
Tip: Check your corporate returns for the past three years. If you’ve overpaid Uncle Sam, file an amended return (Form 1120X) to obtain a refund.