Corporate alternative minimum tax.
A corporation qualifying as a "small corporation" is not subject to the alternative minimum tax. A small corporation is a corporation that for its first tax year beginning after 1996 has average annual gross receipts not exceeding $5,000,000 for the preceding three-year period (if the corporation was in existence less than three years, then the test will be applied to whatever period it was in existence). Annualization of receipts is required for any short taxable year. Once a corporation qualifies as a small corporation, it will continue to be treated as a small corporation as long as its average gross receipts for the three-year period preceding the taxable year do not exceed $7,500,000.
Gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest, dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer's trade or business. Gross receipts are generally not reduced by the cost of goods or property sold.
The following discussion applies only to those corporations that do not qualify as a "small corporation" and therefore are subject to the alternative minimum tax.
As it applies to corporations, the AMT requires that the corporate tax base be determined with certain adjustments and increased by specific tax preferences. Two of the more common tax preference items are accelerated depreciation and certain tax-exempt interest. In the process of determining the alternative minimum taxable income (AMTI) of a C corporation, 75 percent of the amount by which adjusted current earnings (ACE) exceed the tentative AMTI is added to the tentative AMTI (or 75 percent of the amount by which the tentative AMTI exceeds ACE is subtracted from the tentative AMTI). The resulting amount is then reduced by an exemption of $40,000 less 25 percent of the excess of AMTI over $150,000. The resulting tax base is multiplied by 20 percent to determine the tentative minimum tax. The corporation then pays a tax equal, in effect, to the greater of this amount or its regular tax.
Although ACE is not equivalent to current earnings and profits (E&P), some of the adjustments used in computing ACE rely on E&P concepts. For example, life insurance will increase ACE, since under generally accepted accounting principles E&P are increased by: (1) yearly cash value increases in excess of annual premiums; and (2) death proceeds (including outstanding loans) in excess of basis increased for cash value increases previously included in AMTI. Proceeds from disability income and buy-out policies payable to the corporation are also included in ACE.
Conversely, if premiums are paid for term insurance, or the cash value increase is less than the annual premium, there is a decrease of ACE that reduces exposure to the AMT. However, redemption of the deceased or disabled owner's stock in the same year as the proceeds are received will not avoid an increase in ACE.
The existence of the AMT does not mean that all, or even most, life insurance cash values or death proceeds will be subject to the tax. Much depends upon the corporation's taxable income, tax preference items, and other factors (e.g., S corporations are not subject to the ACE adjustment). Only a portion of cash value increases and death proceeds will be potentially exposed to this tax, since cash value increases will be partially offset by premiums; and death proceeds will be offset by cash values. Even when there is exposure, generally the maximum rate is 15 percent (i.e., a 20 percent tax on 75 percent of ACE). With many corporations payment of the tax will be an acceleration of rather than an increase of tax liability, since it then becomes a credit available to offset a portion of the corporation's tax liability in future years (unlimited carry forward). However, this credit may be useless to the closely held or professional corporation that will have little, if any, taxable income.
Impact Of Alternative Minimum Tax On Life Insurance Death Benefits Payable To C Corporation Death Benefit Taxable Income 100,000 250,000 1,000,000 2,500,000 5,000,000 0 7,000 31,375 150,000 375,000 750,000 7,000 31,375 150,000 375,000 750,000 25,000 12,000 37,625 155,000 380,000 755,000 8,250 33,875 151,250 376,250 751,250 50,000 17,000 43,875 160,000 385,000 760,000 9,500 36,375 152,500 377,500 752,500 100,000 28,250 56,375 170,000 395,000 770,000 6,000 34,125 147,750 372,750 747,750 250,000 80,750 87,500 200,000 425,000 800,000 6,750 119,250 344,250 719,250 500,000 170,000 170,000 250,000 475,000 850,000 80,000 305,000 680,000 1,000,000 340,000 340,000 350,000 575,000 950,000 10,000 235,000 610,000 2,000,000 680,000 680,000 680,000 775,000 1,150,000 95,000 470,000 Note: This chart assumes the C corporation is not exempt from the alternative minimum tax (AMT) as a "small corporation." Small figure represents that portion of the income tax that is attributable to the death benefit (i.e., additional tax imposed under the AMT calculations). The corporation is assumed to have no tax preference items. No adjustments are made for cumulative premiums paid and for possible annual cash value increases in excess of premiums paid (i.e., "basis for ACE"). As an example of how to use this chart, assume a corporation has $500,000 of taxable income in a given year and also receives a death benefit payment of $1,000,000. The corporation will owe federal income taxes of $250,000 of which $80,000 is attributable to the effect of the AMT and the receipt of the life insurance death benefit. If this corporation received the same $1,000,000 death benefit but had $2,000,000 of taxable income, the corporation would owe $680,000 in taxes, none of which would be attributable to the death benefit and the AMT. This chart also indicates that a corporation with taxable income of $1,000,000 could consider increasing its key person life insurance on a key employee from $100,000 to $250,000 without additional exposure to the AMT (i.e., the income taxes remain at $340,000).
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|Title Annotation:||Terms & Concepts|
|Publication:||Field Guide to Estate, Employee, & Business Planning|
|Date:||Jan 1, 2010|
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