It's Time to Repeal Corporate AMT.

• Author: Hinchman, Grace
• Position: Washington Insights - Alternative minimum taxes - Brief Article

The old adage "what's goes around comes around" certainly holds true for tax legislation. When I was working for Digital Equipment Corp., I spent a lot of time during the mid-1990s working to repeal the Alternative Minimum Tax (AMT) 90 percent rule for net operating losses (NOLs). AMT permits a disallowance of 90 percent of the NOLs, leaving 10 percent of the NOLs as a tax liability.

Because Digital was carrying huge NOLs, the company was paying millions of dollars in taxes on 10 percent of its losses instead of plowing that money back into the company in research and development -- a vivid example of the stupidity of AMT! Digital no longer exists, having been acquired by Compaq Computer Corp. However, talk of repeal is in the air again, and it seems there is a decent chance that Congress will eliminate corporate AMT as a provision of its Economic Stimulus Package.

Calling AMT a "minimum" tax is a misnomer, It is actually an alternative "maximum" tax because a company is required to calculate its tax liability in two different ways. First, it uses the deductions and credits available under the regular income tax. Then, it must do a completely separate calculation, requiring a completely different set of records. Its tax liability is the higher of the two calculations.

The alternate calculation uses an income base significantly larger than the base for computing the regular tax, The difference is primarily attributable to an outdated depreciation system; an inventory calculation that penalizes companies for inflation; disallowance of tax credits, such as R&D, work opportunity tax credit and others; as well as the cap on net operating losses and foreign tax credits.

As a result of this calculation, many firms that are actually losing money may still be required to pay the AMT. This is particularly true in times of slow economic growth or during a downturn. Although companies can theoretically recover the excess tax payments through credits against the regular tax in future years, many have been unable to claim any of the credits since the AMT was enacted in...