Chapter 3 Corporations: Special Situations
We cover only alternative minimum tax – L.O. 6 through L.O. 9
Alternative Minimum Tax (AMT)
General information
AMT makes it more likely that corporations will pay some income tax. "Regular"
taxable income (base) and tax liability (using rate schedule and then credits) are
calculated first. AMT rules expand the base and apply a single rate, 20% and then allow
fewer credits. The taxpayer pays whichever is higher.
Example: regular tax liability = 250,000
tentative minimum tax = 270,000
How much tax is owed?
What is the AMT amount?
After 1997, small corporations are exempt from the AMT, and therefore, do not need to
go through all the AMT calculations. “Small” is based on average annual gross receipts.
Calculating AMT (AMT formula Figure 6-1)
Regular taxable income before any NOL carryover that was deducted
Plus preferences
Plus or minus adjustments
= AMTI before ACE adjustment and before NOL
Plus or minus ACE adjustment (ACE is adjusted current earnings)
= AMTI before AMT NOL deduction
Minus AMT NOL (limited to 90% of previous line)
= AMTI (Alternative Minimum Taxable Income)
Minus exemption (subject to phase out)
= Tentative minimum tax base
x 20 %
= Tentative minimum tax before credits
Minus allowable foreign tax credit (90% of tentative minimum tax before credits)
= Tentative minimum tax
Compare tentative minimum tax with regular tax after regular tax FTC and pay
whichever is higher
Handout #1, Handout #2
HW 17, 19
1
Preferences (add)
Preferences generally include some kind of income that was excluded for regular tax
purposes.
Examples: tax-exempt interest from private activity bonds, percentage depletion
in excess of the adjusted basis of the property
Adjustments (add or subtract)
Adjustments arise from timing differences between AMT rules and regular tax rules.
Examples:
 Depreciation, amortization, and depletion. These amounts are calculated for
AMT purposes using rules that are different from rules for regular tax
calculations. Note, gains and losses on the sale of these assets will then be
different for AMT and regular tax because the accumulated
depreciation/amortization/depletion amounts are different.

Long-term contract accounting. Completed contract method can be used for
regular tax for some construction, but percentage of completion is required for
AMT purposes.

Installment method for dealers (i.e., the property sold is inventory). The full
amount of income/gain is reported for AMT when realized.

Production activities deduction.
These rules have the overall effect that deductions take longer for AMT and income is
reported sooner.
Handout #3 to #6 HW 43
Adjustment for Adjusted Current Earnings (plus or minus)
The ACE adjustment is made for some taxable income items that are not already part of
the AMT calculation (i.e., not a preference item or adjustment item above).
"Adjusted current earnings" (ACE) is calculated and compared to AMTI after preferences
and after all the other adjustments ("pre-adjustment AMTI" or the subtotal = AMTI
before ACE adjustment).
If ACE is higher than pre-adjustment AMTI, a positive adjustment will be made (the
AMT tax base will be increased).
If ACE is lower than pre-adjustment AMTI, a negative adjustment might be made (the
AMT tax base will be decreased).
 The adjustment amount is 75% of the difference between the two amounts.
 Negative adjustments can only be made to the extent there are net prior period
positive adjustments.
44 HW 20
2
The ACE calculation requires a reconciliation from AMTI thus far calculated to arrive at
ACE. There are some references to earnings and profits (E&P) for these calculations, but
you don't really have to know what E&P is.
ACE calculation =>
Pre-adjustment AMTI
Plus or minus ACE depreciation adjustment (AMT depreciation - ACE depreciation)
Plus inclusion of certain types of income
 Tax-exempt interest that’s not a preference (net of interest expense incurred to
generate the income), key person life insurance proceeds, increase in cash
surrender value of life insurance
Plus disallowance of certain deduction items
 DRD for 20% or less ownership (i.e., 70% DRD)
Plus or minus other items
 Organization cost amortization (not allowed for ACE), non-inventory installment
sales (installment method not allowed for ACE), LIFO reserve adjustments (LIFO
not allowed for ACE), key person life insurance expense (allowed for ACE)
= ACE
Then: compare pre-adjustment AMTI to ACE to determine the ACE adjustment.
45 (solution manual should say “Increase in LIFO recapture amount” for the
inventory addition amount)
AMT NOL
The AMT NOL is limited to 90% of the AMTI before the AMT NOL deduction. The
corporation will have a regular tax NOL carryforward and an AMT NOL carryforward.
Exemption
Base amount = $40,000
Phase-out of exemption: 25% of the amount by which AMTI exceeds $150,000. The
phase out range ends at $310,000 (310,000 = 150,000 + 40,000/.25).
46 Brandt in class HW 46 Tern and Snipe, 21
Minimum Tax Credit
If AMT is paid, the AMT carries forward as a credit to be used to offset the corporation's
regular tax liability when the regular tax liability is greater than AMT.
Handout #7
Handout #8 (comprehensive)
HW 24
3