Chapter 14
Business Tax Credits and Corporate
Alternative Minimum Tax
Taxation of Business Entities
Copyright ©2010 Cengage Learning
Taxation of Business Entities
C14-1
Tax Credit VS. Tax Deduction
• Tax benefit received from a tax deduction depends
on the marginal tax rate of the taxpayer
– Tax benefit received from a tax credit is not affected by
the taxpayer’s marginal tax rate
• Example: $1,000 expenditure: tax benefit of 25%
credit compared to tax deduction at various
marginal tax rates
MTR
0% 15% 35%
Tax benefit if a 25% credit is allowed $250 $250 $250
Tax benefit if tax deduction is allowed –0– $150 $350
Taxation of Business Entities
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General Business Credit (slide 1 of 2)
• Comprised of a number of business credits
combined into one amount
• Limited to net income tax reduced by
greater of:
– Tentative minimum tax
– 25% of net regular tax liability that exceeds
$25,000
• Unused credit is carried back 1 year, then
forward 20 years
Taxation of Business Entities
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General Business Credit (slide 2 of 2)
• Includes the following:
–
–
–
–
–
–
Tax credit for rehabilitation expenditures
Work opportunity tax credit
Research activities credit
Low-income housing credit
Disabled access credit
Credit for small employer pension plan startup
costs
– Credit for employer-provided child care
Taxation of Business Entities
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Rehabilitation Expenditure Credit
(slide 1 of 3)
• Credit is a percentage of expenditures made
to substantially rehabilitate industrial and
commercial buildings and certified historic
structures
• Credit rate
– 20% for nonresidential and residential certified
historic structures
– 10% for other structures originally placed into
service before 1936
Taxation of Business Entities
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Rehabilitation Expenditure Credit
(slide 2 of 3)
• To qualify for credit, building must be
substantially rehabilitated meaning qualified
rehab expenditures exceed the greater of:
– The adjusted basis of the property before the rehab
expenditures, or
– $5,000
• Qualified rehab expenditures do not include the
cost of the building and related facilities or cost of
enlarging existing building
Taxation of Business Entities
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Rehabilitation Expenditure Credit
(slide 3 of 3)
• Basis in structure is reduced by the credit
amount
• Subject to recapture if rehabilitated property
held less than 5 years or ceases to be
qualifying property
Taxation of Business Entities
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Work Opportunity Tax Credit
(slide 1 of 3)
• Applies to first 12 months of wages paid to
individuals falling within target groups
– Credit limited to a percentage of first $6,000
wages paid per eligible employee
• 40% if employee has completed at least 400 hours
of service to employer
• 25% if at least 120 hours of service
– Deduction for wages is reduced by credit
amount
Taxation of Business Entities
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Work Opportunity Tax Credit
(slide 2 of 3)
• Targeted individuals generally subject to
high rates of unemployment, including
– Qualified ex-felons, high-risk youths, food
stamp recipients, veterans, summer youth
employees, and long-term family assistance
recipients
• Summer youth employees: Only first $3,000 of
wages paid for work during 90-day period between
May 1 and September 15 qualify for credit
Taxation of Business Entities
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Work Opportunity Tax Credit
(slide 3 of 3)
• ARRTA of 2009 adds two additional targeted
groups for 2009 and 2010
– Unemployed veterans
• Discharged or released from active duty in 2008, 2009, and
2010, and
• Recipients of unemployment benefits for at least 4 weeks
during the year prior to being hired
– Disconnected youth
•
•
•
•
Aged 16 to 25 when hired
Not attending school
Not employed for the six months prior to being hired, and
Not having sufficient skills to be employed
Taxation of Business Entities
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Work Opportunity Tax Credit: LongTerm Family Assistance Recipient
(slide 1 of 2)
• Applies to first 24 months of wages paid to
individuals who have been long-term
recipients of family assistance welfare
benefits
– Long-term is at least an 18 month period ending
on hiring date
Taxation of Business Entities
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Work Opportunity Tax Credit: LongTerm Family Assistance Recipient
(slide 2 of 2)
• Maximum credit is a percentage of first
$10,000 qualified wages paid in first and
second year of employment
– 40% in first year
– 50% in second year
• Maximum credit per qualified employee is
$9,000
– Deduction for wages is reduced by credit amount
Taxation of Business Entities
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Research Activities Credit
(slide 1 of 5)
• Comprised of three parts
– Incremental research activities credit
– Basic research credit
– Energy research credit
Taxation of Business Entities
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Research Activities Credit
(slide 2 of 5)
• Incremental research activities credit
– Credit amount = 20% × (qualified expenditures – base
amount)
• Expenditures qualify if research relates to
discovery of technological info intended for use
in developing a new or improved business
component for taxpayer
– Expenditures qualify fully if research done in-house
– Only 65% qualifies if research conducted by outside
party (under contract)
Taxation of Business Entities
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Research Activities Credit
(slide 3 of 5)
• Tax treatment of R&E expenditures
– Full credit and reduce expense deduction by credit
amount
– Full expense deduction and reduce credit by (100% ×
credit × max. corp. tax rate)
– Full credit and capitalize and amortize over 60 months
or more
• Amount capitalized is reduced by full amount of credit only if
the credit exceeds the amount allowable as a deduction
Taxation of Business Entities
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Research Activities Credit
(slide 4 of 5)
• Basic research credit
– Additional 20% credit is allowed on basic research
payments in excess of a base amount
• Basic research payments - amounts paid in cash to a qualified
basic research organization, such as a college or university or a
tax-exempt organization operated primarily to conduct
scientific research
– Basic research is any original investigation for the
advancement of scientific knowledge not having a
specific commercial objective
• The definition excludes basic research conducted outside the
United States and basic research in the social sciences, arts, or
humanities
Taxation of Business Entities
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Research Activities Credit
(slide 5 of 5)
• Energy Research Credit –
– This credit is intended to stimulate additional
energy research
– Credit amount = 20% of amounts paid or
incurred by a taxpayer to an energy research
consortium for energy research
Taxation of Business Entities
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Disabled Access Credit
– Credit available for eligible access expenditures made
by small businesses
• Includes amounts paid to remove barriers that would otherwise
make a business inaccessible to disabled and handicapped
individuals
• Facility qualifies if placed in service before November 6, 1990
– Credit amount
• 50% × expenditures that exceed $250 but not in excess of
$10,250
– Thus, max. credit is $5,000
• Basis in asset is reduced by credit amount
Taxation of Business Entities
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Credit For Pension
Plan Startup Costs
• Small businesses can claim nonrefundable tax
credit for admin costs of establishing and
maintaining a qualified retirement plan
– Small business has < 100 employees who have earned
at least $5,000 of compensation
• Credit amount = 50% of qualified startup costs
limited to max credit of $500 per year for 3 years
– Deduction for startup costs is reduced by amount of
credit
Taxation of Business Entities
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Credit For Employer-Provided
Child Care (slide 1 of 2)
• Employers can claim a credit for providing child
care facilities to their employees during normal
working hours
– Limited to $150,000 per year
• Credit amount:
– 25% of qualified child care expenses
– 10% of qualified child care resource and referral
services
Taxation of Business Entities
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Credit For Employer-Provided
Child Care (slide 2 of 2)
• Deductible qualifying expenses must be reduced
by the credit amount
• Basis of qualifying property must be reduced by
credit amount
• Credit may be subject to recapture if child care
facility ceases to be used for qualifying purpose
within 10 years of being placed in service
Taxation of Business Entities
C14-21
Foreign Tax Credit
(slide 1 of 2)
• The purpose of the foreign tax credit (FTC)
is to mitigate double taxation since income
earned in a foreign country is subject to
both U.S. and foreign taxes
– Credit applies to both individuals and
corporations that pay foreign income taxes
– Instead of claiming a credit, a deduction may be
claimed for the taxes paid
Taxation of Business Entities
C14-22
Foreign Tax Credit
(slide 2 of 2)
• Amount of the credit allowed is the lesser of:
– The foreign taxes imposed, or
– The overall limitation determined according to the
following formula:
Foreign-source TI × U.S. tax before credit
Worldwide TI
= Overall FTC limitation
• Unused FTCs can be carried back 1 year and
forward 10 years
Taxation of Business Entities
C14-23
Alternative Minimum Tax
(slide 1 of 3)
• Designed to ensure that corporations with
substantial economic income pay at least a
minimum amount of federal taxes
• Essentially, a separate tax system with a
quasi-flat tax rate applied to a corporation’s
economic income
Taxation of Business Entities
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Alternative Minimum Tax
(slide 2 of 3)
• If tentative alternative minimum tax >
regular corporate income tax, corporation
must pay regular tax plus the excess, the
alternative minimum tax (AMT)
Taxation of Business Entities
C14-25
Alternative Minimum Tax
(slide 3 of 3)
• For tax years beginning after 1997, small
corporations are not subject to AMT
– A small corporation has average annual gross
receipts of $5 million or less for the preceding
three-year period
– Small corporation continues to qualify as long
as average gross receipts for the preceding
three-year period do not exceed $7.5 million
Taxation of Business Entities
C14-26
AMT Formula for Corporations
(slide 1 of 2)
±
+
=
±
=
–
=
Regular Taxable Income Before NOL Deduction
AMT Adjustments (except ACE adjustment)
Tax preferences
AMTI before AMT NOL deduction and ACE
adjust.
ACE adjustment
AMTI before AMT NOL
AMT NOL (limited to 90% of above amount)
Alternative minimum taxable income (AMTI)
Taxation of Business Entities
C14-27
AMT Formula for Corporations
(slide 2 of 2)
–
=
×
=
–
=
–
=
Alternative minimum taxable income (AMTI)
Exemption
AMT base
20% rate
Tentative AMT before AMT foreign tax credit
AMT foreign tax credit
Tentative minimum tax
Regular tax liability before credits minus reg
FTC
Alternative minimum tax (AMT) if positive
Taxation of Business Entities
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Tax Preference Items
• Percentage depletion in excess of the adjusted
basis of property
• Tax-exempt interest on “private activity bonds”
Taxation of Business Entities
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Adjustments for AMT
(slide 1 of 2)
Adjustments for AMT:
• A portion of depreciation on property placed in
service after 1986
• A portion of amortization claimed on certified
pollution control facilities
• Difference between percentage of completion and
completed contract income
• Difference between gain(loss) on sale of property
for regular tax and AMT purposes
Taxation of Business Entities
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Adjustments for AMT
(slide 2 of 2)
Adjustments for AMT(con’t):
• Passive activity losses of certain closely held
corporations and personal service corporations
• A portion of the difference between “ACE” and
“AMTI”
Taxation of Business Entities
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ACE Adjustment
(slide 1 of 3)
• Ace adjustment = 75% of difference
between AMTI and ACE
– Can be positive or negative
– Negative adjustment is limited to aggregate
positive adjustments less previous negative
adjustments
Taxation of Business Entities
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ACE Adjustment
(slide 2 of 3)
• Starting point for determining ACE is AMTI
– AMTI is defined as regular taxable income
after AMT adjustments and tax preferences
(other than the NOL and ACE adjustments)
Taxation of Business Entities
C14-33
ACE Adjustment
(slide 3 of 3)
• AMTI is adjusted to arrive at ACE
– These adjustments include:
• Exclusion items - Income items that are included in
E & P that are never included in regular taxable
income or AMTI,
• Depreciation on pre-’94 acquisitions using the
alternative depreciation system,
• Disallowed items that are never deductible in
computing E&P,
• Other adjustments
Taxation of Business Entities
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Impact of Certain Transactions
on ACE and E & P (slide 1 of 4)
Effect on
AMTI for
ACE
Effect on Taxable
Income for E&P
Add
Add
Federal income
tax
No Effect
Subtract
Dividends
received
deduction (70%)
Add
Add
Tax exempt
income (less
expenes)
Taxation of Business Entities
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Impact of Certain Transactions
on ACE and E & P (slide 2 of 4)
Effect on
AMTI for
ACE
Effect on Taxable
Income for E&P
DRD (80% and
100%)
No effect
Add
Exemption (up to
$40,000)
No Effect
No Effect
Add
Add
Key employee
insurance
proceeds
Taxation of Business Entities
C14-36
Impact of Certain Transactions on
ACE and E & P (slide 3 of 4)
Effect on
AMTI for
ACE
Effect on Taxable
Income for E&P
No effect
Subtract
No Effect
Subtract
Disallowed meals/
entertainment
No effect
Subtract
Penalties/fines
No effect
Subtract
Excess capital
losses
Excess charitable
contributions
Taxation of Business Entities
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Impact of Certain Transactions
on ACE and E & P (slide 4 of 4)
Deferred gains on
installment sales
Loss between
related parties
Build-up of value
of life insurance
Taxation of Business Entities
Effect on
AMTI for
ACE
Effect on Taxable
Income for E&P
Add
Add
No effect
Subtract
Add
Add
C14-38
Exemption
• Exemption amount for a corp = $40,000
– Reduced by 25% of excess of AMTI over
$150,000
– Exemption is totally phased-out when AMTI
reaches $310,000
Taxation of Business Entities
C14-39
Minimum Tax Credit
• AMT paid in one year can be used as a
credit against future regular tax liability that
exceeds its tentative minimum tax
– Indefinite carryforward
– Cannot be carried back
– Cannot offset any future minimum tax liability
Taxation of Business Entities
C14-40
AMT Example
(slide 1 of 4)
Moreland Co. has the following income, etc. in 2009:
Taxable income
$100,000
Depreciation adjustment
18,000
Installment gain (not on inventory sale)
80,000
Federal income tax provision on
financial stmts.
75,000
Penalties and fines
2,000
Private activity bond interest income
25,000
Other tax-exempt interest
20,000
– The depreciation adjustment is an AMT adjustment and the private
activity bond interest is a tax preference for AMTI.
Taxation of Business Entities
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AMT Example
(slide 2 of 4)
Calculation of AMTI before ACE:
Taxable income
Plus: private activity bond income
Plus: depreciation adjustment
AMTI
Taxation of Business Entities
$100,000
25,000
18,000
$143,000
C14-42
AMT Example
(slide 3 of 4)
Calculation of ACE Adjustment:
AMTI before ACE
Plus: deferred installment gain
Plus: other tax-exempt income
Adjusted current earnings
Less: AMTI
Base amount for Ace Adjustment
Times rate:
ACE Adjustment (positive)
Taxation of Business Entities
$143,000
80,000
20,000
$243,000
143,000
$100,000
75%
$ 75,000
C14-43
AMT Example
(slide 4 of 4)
Calculation of AMT:
AMTI before ACE
$143,000
Plus: ACE Adjustment
75,000
AMTI
$218,000
Less: Exemption
23,000
Alternative minimum tax base
$195,000
20% rate
× 20%
Tentative minimum tax
$ 39,000
Less: regular tax
(22,250)
AMT(TMT-Regular tax)
$ 16,750
Total cash paid = Regular tax + AMT = $ 39,000
Taxation of Business Entities
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Individual AMT
(slide 1 of 3)
• AMT applicable to individuals is similar to
the corporate AMT with several important
differences
– The individual AMT rate is slightly
progressive, with rates at 26% on first $175,000
of AMTI and at 28% on any additional AMTI
– The alternative rate on net capital gain of 0% or
15% applies
Taxation of Business Entities
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Individual AMT
(slide 2 of 3)
– The AMT exemption and phaseout amounts are
tied to the individual’s filing status for the year
– Individuals make no AMT adjustment for ACE
– Taxes, misc. itemized deductions subject to the
2% floor,the standard deduction and personal
and dependency exemptions are not allowed
– Medical expenses are allowed only to the extent
that they exceed 10% of AGI (instead of a
7.5%)
Taxation of Business Entities
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Individual AMT
(slide 3 of 3)
– Interest expense deductions are limited to
• Qualified residence interest
• Interest on certain student loans, and
• Investment interest (subject to limitations)
– Determination of the minimum tax credit
is more complex for individual taxpayers
• The credit applies only to AMT generated as
a result of timing differences
Taxation of Business Entities
C14-47
If you have any comments or suggestions concerning this
PowerPoint Presentation for South-Western Federal
Taxation, please contact:
Dr. Donald R. Trippeer, CPA
trippedr@oneonta.edu
SUNY Oneonta
Taxation of Business Entities
C14-48