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

AMTI is regular taxable income determined with certain adjustments and increased by tax preferences.⁶ Tax preferences for corporate taxpayers are the same as for other taxpayers. Adjustments to income included the following: (1) property was generally depreciated under a less accelerated or a straight line method over a longer period, except that a longer period was not required for property placed in service after 1998; (2) mining exploration and development costs were amortized over 10 years; (3) a percentage of completion method was required for long-term contracts; (4) net operating loss deductions were generally limited to 90 percent of AMTI (although some relief was available in 2001 and 2002); (5) certified pollution control facilities were depreciated under the alternative depreciation system except those that were placed in service after 1998, which would use the straight line method; and (6) the adjustment based on the corporation’s adjusted current earnings (ACE).⁷

To calculate ACE, a corporation began with AMTI (determined without regard to ACE or the AMT net operating loss) and made additional adjustments. These adjustments included adding certain amounts of income that were includable in earnings and profits but not in AMTI (including income on life insurance policies and receipt of key person insurance death proceeds). The amount of any such income added to AMTI was reduced by any deductions that would have been allowed in calculating AMTI had the item been included in gross income. The corporation was generally not allowed a deduction for ACE purposes if that deduction would not have been allowed for earnings and profits purposes. However, certain dividends received by a corporation were allowed to be deducted. Generally, for property placed into service after 1989 but before 1994, the corporation was required to recalculate depreciation according to specified methods for ACE purposes. For ACE purposes, earnings and profits were adjusted further for certain purposes such as the treatment of intangible drilling costs, amortization of certain expenses, installment sales, and depletion.⁸

Application of the adjustments for ACE with respect to life insurance is explained at Q 316.

A corporation subject to the AMT in one year could have been allowed a minimum tax credit against regular tax liability in subsequent years. The credit was equal to the excess of the adjusted net minimum taxes imposed in prior years over the amount of minimum tax credits allowable in prior years.⁹ However, the amount of the credit could not be greater than the excess of the corporation’s regular tax liability (reduced by certain credits such as certain business related credits and certain investment credits) over its tentative minimum tax.¹⁰

Because the 2017 Tax Act eliminated the corporate AMT, corporate taxpayers with existing AMT credit from a prior year may offset regular tax liability with the credit for any taxable year. Existing AMT credits will be refundable for tax years after 2017 and before 2022 in an amount equal to 50 percent (100 percent before 2021) of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability (this basically means that the full amount of the credit will be available before 2022).¹¹ But see CARES Act below.

CARES Act

As noted above, the 2017 tax reform legislation generally repealed the corporate AMT, but also permitted corporations to continue claiming a minimum credit for prior year AMT paid. The credit can generally be carried forward to offset corporate tax liability in a later year. The CARES Act eliminates certain limitations that applied to the carryover provision, so that corporations could claim refunds for their unused AMT credits for the first tax year that began in 2018 (i.e., the corporation was required to take the entire amount of the refundable credit for 2018).¹² The corporation must submit the application for refund before December 31, 2020.

The IRS implemented a temporary procedure that allowed taxpayers to fax Form 1139 and Form 1045 to get faster refunds related to prior year AMT credits and NOL deductions. The fax procedures appled only to elections under CARES Act Section 2303 (NOLs) and Section 2305 (AMT credit). Forms were faxed to 844-239-6236 (Form 1139) or 844-239-6236 (Form 1045). The same forms could be used for both claims, and the IRS advised that the form instructions could be disregarded pending release of revised instructions.¹³