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Play your ‘Get out of AMT free’ card

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in Small Business Tax

Individual taxpayers aren’t the only ones who should fear the alternative minimum tax (AMT). C corporations also might be blindsided by this so-called stealth tax.

Strategy: If you operate a qualified small corporation, take advantage of a special tax-law exception.

The AMT doesn’t apply if your average gross receipts for every three-year period before this year did not exceed $7.5 million. The IRS lowers this figure to $5 million if you’re in your first three-year period. New corporations are exempt.

If you can’t squeeze through the tax loophole for small corporations, you’ll have to meet the AMT head-on when you file your company’s 2006 return.

Here’s the drill: In principle, the corporate AMT works a lot like the regular tax. But, in general terms, it applies to a broader spectrum of income with fewer deductions. You must pay the corporate AMT if the AMT calculation is higher. The tax rate on corporate AMT income is 20 percent.

The corporate AMT often turns into a timing game, since firms can take an AMT credit against regular taxes in future years.

Example: Say your company’s AMT liability for the 2006 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 bill by $1 million. Thus, you pay only $500,000 in tax for 2007.

One catch: Your 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 its AMT credit carryover ($1.5 million minus $1.25 million). The remaining credit carry-over may be used in subsequent years.

Because the AMT provisions are so complex, it’s easy to mess up the credit or otherwise miscalculate your company’s liability, especially if you’re not a tax pro.

Tip: Work with your tax pro to check your returns for the last three years. If you’ve overpaid Uncle Sam, file an amended return (Form 1120X) for a refund.

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