Qualifying as a small business corporation for AMT purposes.

• Author: Ellentuck, Albert B.
• Position: Alternative minimum tax

The alternative minimum tax (AMT) does not apply to small business corporations (Sec. 55(e)). A corporation qualifying for small business corporation status avoids both the administrative burden and the potential additional tax liability of the AMT.

Meeting the Gross-Receipts Test to Qualify as a Small Business Corporation

A small business corporation is defined as a corporation having three-year average annual gross receipts not exceeding $5 million for its first tax year and not having three-year average annual gross receipts exceeding $7.5 million for any later year (Sec. 55(e)).That is, to qualify, the corporation's average gross receipts for all three tax-year periods ending before the current tax year must be $7.5 million or less.

Example 1. Calculating the gross-receipts test: ABC Inc. has been in existence since Jan. 1, 2007, and uses a calendar year end. Its gross receipts for the previous years are shown in Exhibit 1.

ABC is exempt from AMT for 2007 since that was its first year in existence (Sec. 55(e)(1)(C)). It qualifies as a small business corporation for 2008 since its average gross receipts for the first three years (or portion thereof) of existence are less than $5 million (Sec. 55(e)(1)(B)).

ABC will continue to qualify for the AMT exemption in 2009 and later years if the average gross receipts for the previous three years (or portion thereof) do not exceed $7.5 million (Sec. 55(e) (1)(A)). Therefore, ABC remains qualified as a small corporation for 2009 through 2013. However, for 2014, ABC will no longer qualify for the exemption since its average gross receipts for the previous three-year period exceeded $7.5 million. It does not matter that ABC's gross receipts for 2014 were less than $7.5 million.

Meeting the Gross-Receipts Test Annually

The gross-receipts test must be met annually. Once average gross receipts exceed $7.5 million, the corporation will never again qualify for the small business corporation exemption, even if average gross receipts fall below $7.5 million in future years.

Example 2. Failing the gross-receipts test: Assume the same facts as in Example 1. Because ABC became subject to the AMT for 2014, it will continue to be subject to it in all subsequent years. Therefore, whenever possible, it is extremely important to manage the level of receipts for the year in question to ensure that the corporation continues to qualify in the following years.

Controlling Income to Meet the Gross-Receipts Test

Pro forma calculations can be made prior to year end for corporations in danger of losing their small business exemptions from the AMT due to failing the Sec. 55(e) gross-receipts...