Alternative Minimum Tax Provisions Under the Tax Reform Act of 1986
| Publication year | 1987 |
| Pages | 615 |
1987, April, Pg. 615. Alternative Minimum Tax Provisions Under the Tax Reform Act of 1986
Beginning in 1987, the Tax Reform Act of 1986 ("Act")(fn1) greatly expands the alternative minimum tax ("AMT") for individuals. The Act also repeals the old corporate add-on minimum tax and adopts a completely new AMT system for corporations. According to the Committee Reports, the congressional intent behind the new AMT provisions is to ensure that no taxpayer with substantial economic income will avoid paying federal income tax through the use of exclusions, deductions or credits.(fn2)
The impact of these provisions will be most significant on subchapter C corporations ("C corporations"). The AMT rules complicate corporate taxation by requiring C corporations to treat a portion (50 percent) of the excess of financial statement income over alternative minimum taxable income ("AMTI") as an item of tax preference. This provision, in effect, accelerates the recognition of corporate income subject to tax by reference to financial statement income determined in accordance with generally accepted accounting principles.
From a practical standpoint, corporate taxpayers are now faced with a separate tax system which will necessitate separate computations of income and deductions each year. No fewer than three sets of records will be required of corporate taxpayers---one for financial reporting purposes, one for regular tax purposes and one for AMT purposes. In addition, the Act requires corporations to make estimated tax payments to cover their minimum tax liability.
This article briefly reviews the old minimum tax provisions and discusses, in general terms, the new AMT rules. As the AMT takes on a more prominent role after January 1, 1987, practitioners should become familiar with the rules to provide appropriate tax planning to their clients.
Under prior law, individuals were subject to an AMT to the extent the AMT exceeded the individual's regular tax owed. The AMT was levied at a flat rate of 20 percent on AMTI in excess of an exemption amount. The AMTI was generally computed by increasing an individual's adjusted gross income ("AGI") for certain items of tax preference and decreasing the AGI for certain itemized deductions. Common items of tax preference for individuals included the excess of accelerated depreciation over straight-line on real property, percentage depletion in excess of the property's basis, the excess of the fair market value over the option price on incentive stock options and the portion of capital gains (60 percent) previously excluded from gross income.
For corporate taxpayers, prior law imposed an add-on minimum tax with respect to certain tax preferences that was paid in addition to the corporation's regular tax liability. This tax was generally equal to 15 percent of the amount by which the sum of certain tax preferences exceeded the greater of the corporation's regular tax liability or $10,000. The preference items included excess accelerated depreciation on real property, excess percentage depletion, a portion of the corporation's net long-term capital gains, amortization of certified pollution control facilities and bad debt reserves for financial institutions. Personal holding companies ("PHCs") were subject to the same add-on minimum tax calculated on additional items of tax preference. Prior law also imposed certain percentage reductions on the computation of particular tax preferences for regular tax purposes.(fn3)
The computation of AMT for corporations now parallels the computation of AMT for individuals. In this respect, the common rules are discussed concurrently.
Code § 55(a) imposes an AMT at the rate of 21 percent for individuals (20 percent for corporations) on AMTI (1) in excess of an exemption amount, and (2) as reduced by the AMT foreign tax credit for the year. The exemption amount is $40,000 for joint taxpayers ($30,000 for single taxpayers) and corporations but is phased out by 25 percent of the amount by which AMTI exceeds $150,000 ($112,500 for single taxpayers). The exemption amount is therefore completely phased out where the AMTI equals or exceeds $310,000 for joint taxpayers ($232,500 for single taxpayers) or corporations.
The term "AMTI" is defined as taxable income determined with the adjustments provided in Code §§ 56 and 58, and increased by the items of tax preference described in § 57.(fn4) Unlike prior law, the new AMT system for...
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