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While
many more individual taxpayers are finding themselves subject to the
Alternative Minimum Tax (AMT), corporations are also subject to their own
version of AMT. The corporate
AMT applies to “C” Corporations only since “S” Corporations and
Partnerships pass any AMT adjustments to their respective
shareholders/partners. In either
case the calculation of “Preference” items, transactions that are
handled differently for regular tax and AMT purposes, can be quite an
undertaking.
There
is good news for many corporations. Certain
corporations are exempt from the corporate AMT.
These entities are known as “Small Corporations”.
To be classified as a small corporation, it must be in its first year
of existence (regardless of the amount of gross receipts in the first year)
or it must meet the following two tests:
1) it was treated as a small corporation exempt from AMT for all tax
years beginning after 1997 and 2) its average annual gross receipts for the
3-tax-year period prior to the current year does not exceed $7.5 million.
The limit is $5 million if the corporation only had one prior year of
existence. Once a corporation
looses its small corporation status, it cannot qualify in any subsequent
year.
For
corporations subject to the AMT, the list of items requiring a recalculation
for AMT purposes can be found on Form 4626, Alternative Minimum Tax –
Corporations and the accompanying instructions.
The following is a list of the more common calculations that
corporations must make in order to determine AMT:
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Depreciation
of post-1986 property – 1) property placed in service after 1998 using
the 200% declining balance method, 2) on Section 1250 property after
1998 not using the straight line method and 3) tangible property after
1986 and before 1999. The
depreciation must be recalculated using the appropriate AMT methods.
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Adjusted
gain or loss – if a corporation sells assets in which depreciation was
recalculated for AMT, the gain or loss will need to be adjusted for AMT
purposes.
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Long
term contracts – generally the percentage-of-completion method must be
used for AMT. This does not
apply to home construction contracts.
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Passive
activities (closely held and personal service corporations only) –
passive activity gains and losses need to be refigured using the AMT
adjustments.
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Loss
limitations – activities in which losses are limited due to the amount
“at-risk” or basis limitations must be refigured for the AMT.
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Depletion
– this deduction must be refigured taking into account only income and
deductions allowed for AMT and the AMT taxable income limitation.
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Tax-exempt
interest on private activity bonds – this must be added back to arrive
at AMT taxable income.
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Intangible
drilling costs (IDC) – an “excess” IDC must be calculated if an
election to write off costs over 5 years (for regular tax) was not made.
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