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Don’t let the corporate AMT blindside you

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in Small Business Tax

Plenty has been written and said about the alternative minimum tax (AMT) that ensnares millions of individual taxpayers each year. But individuals aren’t the only ones who might be victimized by an onerous “stealth tax.”

Strategy: Watch out for the corporate AMT. It’s not as well-known as its close cousin, the individual AMT, but the results can be just as devastating to a corporate taxpayer.

Try to get a handle on the key rules. You may qualify for an exemption for small corporations if your company’s income took a dive 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 2008 return.

Here’s the drill: The corporate AMT generally applies to a wider spectrum of income with fewer deductions. As with the individual AMT, you must pay the corporate AMT if the “tentative tax” calculation is higher than the 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: Hit the ceiling or the floor

Let’s say your company’s AMT credit carried over from the 2008 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. Therefore, it has to pay only $500,000 in tax for 2009.

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 its AMT credit from 2008 ($1.5 million – $1.25 million). The remaining credit may be used in subsequent years.

Because the provisions in this area are 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 try to handle the return yourself.

Tip: Check your corporate returns for the past three years. If you’ve overpaid Uncle Sam, file an amended return (Form 1120X) for a refund. 

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