Corporate alternative minimum tax: ACE simplified and MTC liberalized.

• Author: Starr, Samuel P.

Corporate Alternative Minimum Tax: ACE Simplified and MTC Liberalized

Introduction

The corporate alternative minimum tax (AMT) will be computed differently beginning with 1990 tax years as a result of the arrival of the adjusted current earnings (ACE) adjustment. Enacted as part of the Tax Reform Act of 1986, the ACE adjustment will replace the rather arbitrary book income adjustment as a means of capturing a measure of economic income within the AMT income base.

Although the overall theme for 1989's tax legislation was to raise revenue, Congress adopted some costly benefits for corporations which simplify the ACE calculation as originally enacted and modify the AMT system by liberalizing the minimum tax credit (MTC) computation.

This article discusses the newly enacted changes of the Revenue Reconciliation Act of 1989 and compares them to the ACE provisions previously scheduled to go into effect but now dropped from the AMT rules.

Background

In April 1989, Representative Dan Rostenkowski, Chairman of the House Ways and Means Committee, introduced H.R. 1761 to dramatically simplify the AMT by integrating ACE into the AMT computation. Although the Rostenkowski proposal did not survive the legislative process, a modified House version of AMT simplification is included in the 1989 Act. In general, these provisions will have a positive effect on corporate taxpayers starting with tax years beginning after December 31, 1989.

As originally enacted, the ACE computation promised to be extremely complex. For example, calculations for depreciation, depletion, intangible drilling costs (IDCs), and mineral exploration and development costs would have required (i) computing deductions over a series of years, (ii) present valuing these deduction streams, and (iii) comparing them to present valued book deduction streams prior to including the item into the ACE calculation.

Following the 1989 Act, the ACE adjustment is no longer connected to the book income adjustment and will not require present value computations. Even though the corporate AMT is simpler, corporations still must make preparations to implement the new ACE computations, as well as consider planning opportunities available during the final year of the book income adjustment to take advantage of how the different provisions affect AMT income (AMTI). In addition, corporations must focus on ACE in order to make meaningful projections of 1990 and future tax liability and FASB 96 tax accruals, as well as for 1990 estimated tax payments.

Comparison of Book Income to ACE

Under the original system, the book income adjustment under section 56(f) of the Internal Revenue Code is a corporate AMT addback equal to 50 percent of the positive excess of adjusted book income over tentative AMTI. This adjustment is based on the difference between book income and taxable income reporting. Temp. Reg. $S 1.56-1T (issued April 27, 1988) provides detailed guidance on the computation of adjusted net book income. In contrast, no regulations have been issued concerning the ACE adjustment. (1)

Beginning in 1990, adjusted current earnings will replace the book income adjustment. The ACE adjustment defined in section 56(g) equals 75 percent of the difference between tentative AMTI (before net operating losses (NOLs) or the ACE adjustment) and ACE. ACE is not based on financial statement income, but rather, the amount derived is supposed to approach economic income. This is achieved by making certain statutorily prescribed adjustments to AMTI and by borrowing some earnings and profits (E&P) adjustments. Although ACE incorporates certain E&P adjustments, it should not be confused with current E&P. In addition, the ACE adjustment, unlike the book income adjustment, can be negative (reducing AMTI), but only to the extent of prior positive ACE adjustments. These differences in the measure of book income versus ACE create meaningful planning opportunities, several of which are discussed below, and should be considered in optimizing AMT treatment under the two computations.

Computation of ACE

In order to determine ACE, corporations must prepare and maintain a separate set of records for certain types of income and expense which may be accounted for differently under section 56(g)(4) than for other purposes (e.g., regular tax, AMT, and financial accounting).

The ACE adjustment starts with AMTI before AMT NOLs or the ACE adjustment (tentative AMTI) and then a series of adjustments are made to arrive at ACE. Tentative AMTI is then subtracted from ACE and 75 percent of this difference becomes the ACE adjustment. If the adjustment is negative and there are no (or not enough) prior positive ACE...