800 / How was a corporation’s alternative minimum tax calculated prior to repeal by the 2017 tax reform?
Editor’s Note: The Inflation Reduction Act of 2022 adds a new 15 percent corporate alternative minimum tax to ensure that corporations with at least $1 billion in profits would be subject to a minimum 15 percent income tax rate. The tax applies to any corporation with an average annual adjusted financial statement income that exceeds $1 billion over any consecutive three-year period preceding the current tax year. The 15 percent rate is applied to the company’s “book income,” rather than adjusted gross income as reported to the IRS, in an effort to prevent corporations from using deductions and credits to escape taxation. The law requires corporations with at least $1 billion in earnings to determine their tax liability in two ways. First, the corporation calculates taxes using the existing 21 percent rate structure, using currently available deductions and credits. Second, they calculate tax liability by applying the 15 percent rate to their book income as reported to shareholders and investors on financial statements. The corporation then owes whichever figure is higher.
Prior to 2018, a corporate taxpayer was required to calculate its liability under the regular tax and a tentative minimum tax, then add to its regular tax so much of the tentative minimum tax as exceeds its regular tax. The amount added was the alternative minimum tax.1
To calculate its alternative minimum tax (AMT), a corporation first calculated its “alternative minimum taxable income” (AMTI).2 Also, the corporation calculated its “adjusted current earnings” (ACE), increasing its AMTI by 75 percent of the amount by which ACE exceeded AMTI (or possibly reducing its AMTI by 75 percent of the amount by which AMTI exceeded ACE).3 The tax itself was a flat 20 percent of AMTI.4 Each corporation received a $40,000 exemption; however, the exemption amount was reduced by 25 percent of the amount by which AMTI exceeded $150,000 (thus phasing out completely at $310,000).5