Chapter
5
Other Corporate Tax Levies
Alternative Minimum Tax
Overview
What is the AMT?
Slide 6-3
Alternative income tax system running
parallel to the regular income tax system
Generally has a broader base, lower tax rates
Objective of the AMT:
To ensure taxpayers with substantial
economic incomes pay some minimum
amount of income tax (despite the lawful
use of tax incentives)
Small Corporations
Slide 6-4
Small corporation exemption [IRC §55(e)]
- Average annual gross receipts for prior 3
years less than $7.5 million
- Controlled groups are aggregated
- Special rules for initial years
AMT Overview

Slide 6-5
Regular taxable income
+ NOL carryforward deducted (if any)
+ Tax preferences (if any)
+/- AMT adjustments other than ACE (if any)
AMTI before ACE adjustment
+/- ACE adjustment (if any)
AMTI before AMT NOL deduction
- AMT NOL deduction (if any)
= Alternative Minimum Taxable Income (AMTI)
AMT Overview

Slide 6-6
Alternative Minimum Taxable Income (AMTI)
- AMT exemption
= Taxable excess
X
20%
Tentative Minimum Tax
Slide 6-7
AMT Overview
 [IRC §55(a)] If Tentative Minimum Tax >
Regular tax before credits (except FTC),
then AMT payable equals the excess
Regular tax is before credits except foreign tax
credits [IRC §55(c) and §26(b)]
AMT Credit
Slide 6-8
[IRC §53] When Tentative Minimum Tax <
regular tax, an AMT credit is allowed as a
reduction of regular taxes payable
The AMT credit is limited to the lesser of:
Regular tax less the tentative minimum tax or
The sum of AMT paid in all prior years less the
sum of AMT credits claimed in prior years
Examples 1, 2, and 3
Alternative Minimum Tax
Tax Preferences and
AMT Adjustments
(other than the ACE adjustment)
AMT Tax Preferences
Slide 6-10
Tax preferences are always positive
Interest income from private activity bonds
issued after August 8, 1986 [IRC §57(a)(5)]
Excess percentage depletion from oil and
gas wells [IRC §57(a)(1)]
Excess intangible drilling costs from oil,
gas, etc. properties [IRC §57(a)(2)]
Slide 6-11
AMT Adjustments
Depreciation:
 Real property placed in service after 1986 and
before 1999 [IRC §56(a)(1)]
Tangible personal property placed in service
after 1986 and before 2005 [IRC §56(a)(1)]
AMT basis in excess of regular tax basis for
property dispositions [IRC §56(a)(6)]
Slide 6-12
AMT Adjustments
Long-term contracts must use percentage
of completion for AMT [IRC §56(a)(3)]
Loss limitations must be recalculated
U.S. production activities deduction must
be recalculated [IRC §199(d)(6)]
Alternative Minimum Tax
The ACE Adjustment
Slide 6-14
Adjusted Current Earnings
Adjusted current earnings [IRC §56(g)]
AMTI before ACE adjustment
+/- Adjustments for computing ACE
= Adjusted current earnings (ACE)
Slide 6-15
Adjusted Current Earnings
Adjustments for ACE [IRC §56(g)(4)]:
(+) Tax-exempt interest income (excluding PAB
interest income that is a tax preference)
(-) Disallowed expenses and interest allocable
to tax-exempt income
(+) Proceeds from key-man life insurance
(-) Premiums paid on key-man life insurance
(+) 70% DRD actually deducted
(+/-) LIFO inventory method not allowed
Slide 6-16
Adjusted Current Earnings
Adjustments for ACE [IRC §56(g)(4)]:
(+/-) Depreciation on assets placed in
service 1/1/90 through 12/31/93
(-) Ace basis in excess of AMT basis for
property dispositions of assets above
(+) Amortization of organizational costs
incurred after 1989
(+/-) Installment method not allowed
Slide 6-17
ACE Adjustment
[IRC §56(g)(1)] If the Adjusted Current
Earnings (ACE) exceed the pre-ACE
adjustment AMTI, then the positive ACE
adjustment equals:
75% * (ACE less pre-ACE adj. AMTI)
Slide 6-18
ACE Adjustment – Example 1
Assume:
AMTI before the ACE adjustment = $100,000
Adjusted current earnings (ACE) = $130,000
No AMT NOL carryforward
Then the ACE adjustment =
75% x (130,000 – 100,000) = $22,500
So, AMTI = 100,000 + 22,500 = $122,500
Slide 6-19
ACE Adjustment
[IRC §56(g)(2)] If the Adjusted Current
Earnings (ACE) are less than the pre-ACE
adjustment AMTI, then the negative ACE
adjustment equals the lesser of:
75% * (Pre-ACE adj. AMTI less ACE) or
The sum of positive ACE adjustments in all
prior years over the sum of negative ACE
adjustments in all prior years
Slide 6-20
ACE Adjustment – Example 2
Assume:
AMTI before the ACE adjustment = $100,000
Adjusted current earnings (ACE) = $80,000
Sum of all prior year ACE adj.s = $25,000
No AMT NOL carryforward
Then the ACE adjustment =
75% x (80,000 – 100,000) = ($15,000)
So, AMTI = 100,000 + (15,000) = $85,000
Slide 6-21
ACE Adjustment – Example 3
Assume:
AMTI before the ACE adjustment = $100,000
Adjusted current earnings (ACE) = $80,000
Sum of all prior year ACE adj.s = $12,000
No AMT NOL carryforward
Then the ACE adjustment =
75% x (80,000 – 100,000) = ($15,000)
Limited to ($12,000)
So, AMTI = 100,000 + (12,000) = $88,000
Alternative Minimum Tax
AMT NOL Deduction
and
AMT Exemption
AMT NOL Deduction
[IRC §56(a)(4) and (d)(2)] NOL
carryover is determined after all AMT
adjustments in the year originated
[IRC §56(d)(1)] Limited to 90% of AMTI
before the NOL deduction
Slide 6-23
AMT Exemption
Exemption [IRC §55(d)]
Exemption amount is $40,000
Phase-out of exemption amount:
25% * (AMTI - 150,000)
Exemption cannot go below zero! (Fully
phased-out at AMTI of $310,000 or more)
Slide 6-24
AMT Exemption – Examples
Slide 6-25
What is the exemption for a corporation
with AMTI of $101,500?
$40,000, AMTI < $150,000 (no phase-out)
AMT Exemption – Examples
Slide 6-26
What is the exemption for a corporation
with AMTI of $193,000?
40,000–25%(193,000–150,000)= $29,250
AMT Exemption – Examples
Slide 6-27
What is the exemption for a corporation
with AMTI of $350,000?
$0, AMTI > $310,000 (fully phased-out)
Slide 6-28
AMT Examples
Examples 4, 5, and 6
Problems: C5-36, C5-40, C5-48