Worth repeating: small corporations are exempt from AMT.
Under the Internal Revenue Service Restructuring and Reform Act of 1998, an AMT exemption is available for qualifying small corporations. Sec. 55(e) provides that corporations whose average annual gross receipts for the first three years beginning after 1993 do not exceed $5 million qualify for the exemption; see "Special Circumstances" below. A qualified corporation will continue to be exempt, as long as the average of the immediately preceding three years' gross receipts does not exceed $7.5 million. The first year a corporation could use the exemption was its tax year beginning in 1998.
Example 1: X Co., a calendar-year corporation, came into existence on Jan. 1, 1994. X had to average its annual gross receipts for 1994-1996. If that average was no more than $5 million, it then had to average its annual gross receipts in 1995-1997. If that average was no more than $7.5 million, X was exempt flora AMT for 1998.
A corporation continues to be exempt in future years as long as its immediately preceding three-year rolling average never exceeds $7.5 million. In the above example, X would have been exempt in 1999, if its average annual gross receipts for 1996-1998 did not exceed $7.5 million.
Sec. 448(c)(2) and (3) detail special circumstances on the measurement of gross receipts. Generally, if one of the prior periods is a short year, then the receipts should be annualized. If the corporation was not in existence for an entire three-year period between 1993 and 1998, the tests should be applied for the years it was in existence. "Gross receipts" are defined in Temp. Regs. Sec. 1.448-1T(f)(2)(iv) as receipts from a trade of business, reduced by returns and allowances. Receipts from related entities and predecessor corporations must also be taken into account. The relationships of controlled groups and other entities under common control must be analyzed; obviously, bifurcating a qualified corporation with average annual gross receipts of almost a $7.5 million threshold into multiple entities with similar ownership, would not preserve the AMT exemption.
In most cases, unless a new corporation's gross receipts are aggregated with those of an existing corporation or the entity is treated as a successor corporation, for the first tax year of existence, it is exempt from AMT, under Sec. 55(e)(1)(C).
For qualifying small corporations that are also carrying forward an AMT credit, the credit can be used to offset future regular tax, according to Sec. 55(e)(5). Basically, the credit can be used annually, dollar-for-dollar, against the first $25,000 of regular tax, and 25 cents for every dollar in excess of $25,000.
What happens if a qualified corporation ceases to be exempt?
Example 2: The facts are the same as in Example 1. In 1998-2000, X's average annual gross receipts exceed $7.5 million. X would no longer be exempt from AMT starting in 2001, but only as to preferences and adjustments on transactions and investments entered into after X lost its status as a small corporation. Thus, AMT depreciation adjustments would apply only to asset purchases after 2000; adjustments for long term contracts would apply only to contracts signed after 2000. If X were a loss corporation prior to 2001, generally its regular tax net operating loss (NOL) carry-forwards from that period could be carried forward as AMTNOLs beginning in 2001.
Also, once a corporation fails to qualify as a small corporation exempt from the AMT, it cannot requalify as a result of reduced gross receipts in future years. Thus, when possible, a corporation should consider accelerating or deferring income between tax years to avoid exceeding the $7.5 million limit.
Sec. 55(e) is Congress's attempt to mitigate the administrative burden for small corporations, a burden that usually falls on the tax preparer. Tax advisers may want to review their current clients' eligibility for this exemption, as well as inquire as to its applicability for any new clients. (For more background, see Karlinsky, "The Small Business AMT Exception," TTA, July 1998, p. 480.)
FROM FRANK E. BRODNAX, CPA, ELLIN & TUCKER, CHARTERED, BALTIMORE, MD
Editor: Allen M. Beck, CPA, MST
Ehrenkrantz Sterling & Co., L.L.C.
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|Title Annotation:||Alternative minimum tax; Corporations & Shareholders|
|Author:||Brodnax, Frank E.|
|Publication:||The Tax Adviser|
|Date:||Oct 1, 2003|
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