Simplification proposal could ease complexities of AMT for some businesses.

• Author: Lyon, Andrew B.
• Position: Alternative minimum tax

The individual and corporate alternative minimum tax (AMT) provisions require complex tax computations and apply to large numbers of taxpayers. In April 1997, the Treasury Department proposed a package of income tax simplification measures, including a proposal to eliminate the AMT for corporations with less than $5 million in average annual gross receipts. However, the package did not include any changes to current law for individual AMT payers, who are expected to grow in number from 600,000 in 1997 to 6.2 million in 2006 (based on joint Committee on Taxation estimates). Large corporations would also continue to face substantial complexity under the current AMT rules. In addition, a Treasury simplification proposal relating to the computation of the foreign tax credit (FTC) likely would increase the tax burdens of many AMT payers.

Compliance Costs and Tax

Planning

Tax complexity under the AMT arises in several ways. Compliance burdens relate to computing the AMT and recordkeeping requirements. Also, by taxing certain items excluded from the regular tax base and by eliminating or reducing certain deductions, the AMT creates incentives for taxpayers to conduct their affairs differently than under the regular tax. For instance, a high-income taxpayer who ordinarily might benefit from investing in tax-exempt bonds might find that taxable bonds offer a higher after-tax return. A corporation that ordinarily would borrow to finance purchases of equipment might find that, after taking into account the AMT, a lease offers a better opportunity. Under the AMT, the corporation's interest payments effectively are deducted at only a 20% tax rate and depreciation ahowances on equipment are taken more slowly.

As a result of the AMT, corporations must keep track of depreciation under several different systems: assets purchased before 1987 are disregarded for purposes of the AMT depreciation adjustment, but not for purposes of computing adjusted current earnings (ACE); assets purchased after 1987 must have a separate AMT depreciation calculation deduction; depreciation for ACE is calculated differently for assets purchased prior to 1987, between 1987 and 1989, and between 1990 and 1993; and finally, assets purchased after 1993 require no additional depreciation calculation for ACE. These different treatments of depreciation also give rise to separate calculations of inventory for AMT and ACE purposes.

The AMT also increases planning costs for non-AMT...