Corporate Alternative Minimum Tax

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Page written by Ashlyn Brooks. Last reviewed on November 1, 2024. Next review due October 1, 2025.

As if taxes weren’t complicated enough, there’s the Corporate Alternative Minimum Tax to add to the mix. But it’s not the puzzle you think it is—instead, it’s more about ensuring corporations pay their fair share, especially those with significant income or deductions. At Swoop, we want to help you make sense of these changes, ensuring you’re well-prepared to integrate them into your financial strategy.

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What is Corporate Alternative Minimum Tax?

The Corporate Alternative Minimum Tax (AMT) is a parallel tax system, meaning it operates alongside the regular corporate tax structure. It’s designed to ensure that certain corporations, especially those with large incomes or significant deductions, pay a minimum amount of tax. The AMT acts as a safeguard, preventing corporations from reducing their tax liability too much through deductions and credits.

If a corporation’s AMT liability ends up being higher than its regular tax liability, the company must pay the AMT instead of the regular corporate tax, not in addition to it.

How does Corporate Alternative Minimum Tax work?

The AMT operates as a safeguard to prevent corporations from avoiding business tax obligations by using too many deductions, exemptions, or credits. Here’s how it works:

Step 1: Calculation of tegular tax vs. AMT

Imagine “XYZ Corp.” has a taxable income of $10 million under the regular tax system. They claim deductions and credits that bring their tax liability down to $1 million.

However, under the AMT system, XYZ Corp. must recalculate its income with fewer deductions and credits. Let’s say that under the AMT rules, their taxable income is adjusted to $8 million, resulting in an AMT liability of $1.5 million.

Step 2: Comparison of liabilities

In this case, XYZ Corp.’s regular tax liability is $1 million, while their AMT liability is $1.5 million. Since the AMT liability is higher, XYZ Corp. must pay the $1.5 million instead of the $1 million regular tax.

Step 3: Adjustments and Preferences

The reason XYZ Corp.’s AMT liability is higher is due to adjustments and preferences. For example:

They previously claimed large depreciation deductions under the regular system, but under AMT rules, the depreciation schedule is adjusted, reducing the deduction.
Certain tax credits, like research and development credits, might be limited or disallowed under AMT, increasing taxable income.

Step 4: The AMT’s role

By reducing or eliminating certain deductions and credits, the AMT ensures that XYZ Corp. still contributes a minimum tax, even if aggressive tax planning might have significantly reduced their regular tax liability.

What is the purpose of Corporate Alternative Minimum Tax?

The primary purpose of the Corporate Alternative Minimum Tax is to make sure there’s tax fairness. It’s done by preventing large corporations from avoiding federal taxes through excessive use of deductions and credits.

It promotes equity by ensuring that all corporations, especially those with significant income and tax benefits, contribute a minimum level of tax, even if their regular tax liability would otherwise be reduced significantly through legal tax planning strategies.

Why was the Corporate Alternative Minimum Tax created?

The corporate AMT was created to address concerns over the ability of large, profitable corporations to reduce their tax obligations to near zero. Historically, some corporations have leveraged deductions, credits, and loopholes to minimize taxes, sometimes to the point of owing nothing. The AMT was designed to:

Curb excessive use of deductions: Corporations with large deductions were able to dramatically reduce their tax burden, leading to the creation of the AMT as a counterbalance.
Ensure contribution to public services: By requiring a minimum level of tax, even from companies benefiting from various credits and deductions, the government ensures that corporations contribute to the cost of public infrastructure and services.

Who has to pay Corporate Alternative Minimum Tax?

Under the Inflation Reduction Act of 2022, a new corporate AMT applies to large U.S. corporations. Specifically, corporations that meet the following criteria must pay AMT:

Corporations with average annual financial statement income (also called book income) of more than $1 billion over a three-year period.
Certain foreign-owned U.S. subsidiaries may also be subject to the AMT, depending on their financial structure and income.

Small and medium-sized enterprises (SMEs) generally do not fall under the AMT unless they meet these thresholds.

How to file Corporate Alternative Minimum Tax

Filing for the corporate AMT follows the same process as regular corporate tax filing, but with the additional step of calculating your AMT liability. Key steps include:

Prepare your regular corporate tax return: File Form 1120 (U.S. Corporation Income Tax Return).
Calculate AMT adjustments: Adjust your regular taxable income by removing certain deductions or adding back excluded items.
Determine AMT liability: Use the AMT calculation formula to compare your regular tax and AMT liabilities. If the AMT is higher, you will pay that amount.
File any additional required forms: Corporations subject to AMT must also file Form 4626 (Alternative Minimum Tax – Corporations).

Consulting with a tax professional can be critical in ensuring that AMT is calculated correctly and that your corporation is in compliance.

What are the corporate Alternative Minimum Tax rates for 2024?

The corporate AMT rate for 2024 is 15% of adjusted financial statement income for applicable corporations. This 15% rate applies only to large corporations that meet the income threshold of over $1 billion in average annual profits per year.

It’s good to note that this is in profits, not total sales.

How is Corporate Alternative Minimum Tax calculated?

Calculating the corporate AMT involves several steps. Here’s an outline of how it’s done using our same example company from above:

Step 1: Calculate regular tax

XYZ Corp. begins by calculating its standard taxable income under the regular tax system. For example, they have $10 million in taxable income and apply various deductions and credits, resulting in a regular tax liability of $1 million.

Step 2: Adjust taxable income

Next, XYZ Corp. must adjust its taxable income for items not allowed under the AMT. In this case, they have depreciation deductions that need to be recalculated, reducing their allowed deduction. Additionally, income from tax-exempt bonds, which might be excluded under regular tax rules, is added back. These adjustments bring XYZ Corp.’s adjusted income up to $8 million under the AMT system.

Step 3: Apply AMT rate

Once the adjusted income is calculated, the AMT rate of 15% is applied. In XYZ Corp.’s case, 15% of their $8 million adjusted income results in an AMT liability of $1.2 million.

Step 4: Compare with regular tax liability

Now, XYZ Corp. compares its regular tax liability ($1 million) with its AMT liability ($1.2 million). Since the AMT liability is higher, XYZ Corp. must pay the $1.2 million instead of the $1 million calculated under the regular tax system.

This process requires careful tracking of financial records and tax deductions, and it’s critical for corporations to meet the income threshold.

How Swoop can help

At Swoop, we want to empower and educate business owners, and all of this information is here to inform and guide our readers. What we are real pros at is funding— and we’re committed to helping businesses like yours secure the financial support you need to thrive. Navigating corporate taxes, including the AMT, can be challenging, but ensuring you have the right funding in place is equally critical for growth.

Here’s how Swoop can help:

Providing funding options: Whether it’s working capital or growth financing, our platform offers a range of tailored funding solutions to meet your business’s needs.
Streamlining tax planning: While we don’t offer tax advice, we can help you explore funding opportunities that may ease financial pressures, making it simpler to handle tax obligations like the AMT.
Offering expert guidance: Our team is here to assist you in finding loans, grants, or equity funding that can strengthen your business.

Explore how Swoop can support your financial needs. Check available business loans today to see how we can help you navigate tax obligations while growing your company.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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