It's Time to Repeal Corporate AMT. (Washington Insights).

The old adage "what's goes around comes around" certainly holds true for tax legislation. When I was working for Digital Equipment Corp., I spent a lot of time during the mid-1990s working to repeal the Alternative Minimum Tax (AMT) 90 percent rule for net operating losses (NOLs). AMT permits a disallowance of 90 percent of the NOLs, leaving 10 percent of the NOLs as a tax liability.

Because Digital was carrying huge NOLs, the company was paying millions of dollars in taxes on 10 percent of its losses instead of plowing that money back into the company in research and development -- a vivid example of the stupidity of AMT! Digital no longer exists, having been acquired by Compaq Computer Corp. However, talk of repeal is in the air again, and it seems there is a decent chance that Congress will eliminate corporate AMT as a provision of its Economic Stimulus Package.

Calling AMT a "minimum" tax is a misnomer, It is actually an alternative "maximum" tax because a company is required to calculate its tax liability in two different ways. First, it uses the deductions and credits available under the regular income tax. Then, it must do a completely separate calculation, requiring a completely different set of records. Its tax liability is the higher of the two calculations.

The alternate calculation uses an income base significantly larger than the base for computing the regular tax, The difference is primarily attributable to an outdated depreciation system; an inventory calculation that penalizes companies for inflation; disallowance of tax credits, such as R&D, work opportunity tax credit and others; as well as the cap on net operating losses and foreign tax credits.

As a result of this calculation, many firms that are actually losing money may still be required to pay the AMT. This is particularly true in times of slow economic growth or during a downturn. Although companies can theoretically recover the excess tax payments through credits against the regular tax in future years, many have been unable to claim any of the credits since the AMT was enacted in 1986. All but the very smallest firms are required by law to perform the two separate calculations. Although most of the tax paid under the AMT comes from large firms, close to 75 percent of all AMT returns are from small and medium-size companies, according to the General Accounting Office.

With the AMT, a credit is provided for the amount of liability that exceeds a taxpayer's regular tax. This credit is then allowed to offset regular tax liability in future years, so long as regular liability exceeds minimum liability. Unfortunately, many taxpayers have not been allowed to use their AMT credits because their AMT liability almost always exceeds their regular tax liability. It is a bit like running on a treadmill -- a company runs faster and faster, but always in place, and never is able to utilize its AMT credits.

For these companies, the AMT has operated as an interest-free loan to the government, with little or no prospect of recovering the principal. These AMT credits are reflected as assets on the financial statements and must be written off at some point.

This is why a key provision in the proposed Economic Stimulus Package has been to repeal the AMT and allow companies with unused AMT credits to carry back these credits to offset tax liabilities they have paid under AMT. The AMT is an inefficient system of collecting revenue in that it represents less than 3 percent of total corporate income taxes paid, but accounts for more than 20 percent of IRS compliance costs. Unless the corporate AMT is addressed, the other business tax relief proposals geared toward stimulating business will provide little or no benefit to companies with AMT issues. The time is ripe for repeal.

Grace Hinchman is FEI's senior vice president for public policy.