Small Corporation AMT: Are You Exempt?

The Inflation Reduction Act of 2022 introduced a new Corporate Alternative Minimum Tax (AMT), which acts as a parallel calculation to the regular income tax system. It is designed to ensure certain large, profitable corporations pay a baseline amount of federal income tax, regardless of deductions and credits that might lower their regular tax bill. The tax is set at 15% of a corporation’s adjusted financial statement income.

A specific exemption for corporations that are not considered large means the vast majority of businesses will not be subject to the corporate AMT.

Determining Exemption Status

The primary factor in determining if a corporation is subject to the Corporate AMT is its size, measured by financial statement income. A corporation is exempt if its average annual adjusted financial statement income for a specific three-year period is $1 billion or less. This threshold separates smaller companies from the large enterprises the tax is designed to affect.

To determine its status, a corporation must average its adjusted financial statement income for the three consecutive taxable years preceding the current one. For example, assessing 2024 applicability requires averaging income from 2021, 2022, and 2023. This averaging mechanism smooths out single-year income spikes, providing a more stable measure of a company’s size.

For new companies, the test is applied based on the number of years the corporation has existed. If a taxable year is shorter than 12 months, the adjusted financial statement income for that year must be annualized. This prevents short-period income from distorting the average and incorrectly exempting a rapidly growing company.

Aggregation rules apply when a group of corporations is treated as a single employer, such as a parent company and its subsidiaries. Their financial results must be combined before applying the $1 billion test. This rule prevents companies from avoiding the tax by splitting operations across multiple smaller legal entities.

Different rules apply to corporations that are part of a foreign-parented multinational group. The AMT applies if the group’s worldwide average income exceeds $1 billion and the U.S. members collectively have an average annual adjusted financial statement income of at least $100 million. This test ensures the U.S. operations of large global companies are subject to the tax if they have a substantial financial footprint in the United States.

Calculating Adjusted Financial Statement Income

If a corporation exceeds the exemption threshold, it must calculate its Adjusted Financial Statement Income (AFSI), which is the tax base for the Corporate AMT. The starting point is the net income from the corporation’s Applicable Financial Statement (AFS), the primary financial report used for non-tax purposes. The primary AFS is a financial statement certified under U.S. Generally Accepted Accounting Principles (GAAP).

Several adjustments are then required to arrive at the final AFSI. These adjustments are specified in the tax code to align book income more closely with a tax-based measure of economic income. The primary adjustments include:

• Adding back any federal income tax expense recorded on the financial statements to ensure the AMT is calculated on pre-tax income.
• Accounting for the difference between accelerated depreciation for tax purposes and straight-line depreciation for financial statements.
• Adjusting for certain tax credits that reduce regular tax liability but are not intended to reduce the AMT base.
• Modifying the treatment of transactions between related parties to prevent income shifting.
• Applying specific rules for net operating losses (NOLs), which can offset up to 80% of AFSI but only if generated in tax years after 2019.

Computing the Corporate AMT Liability

After calculating its AFSI, a corporation multiplies the amount by the 15% tax rate to determine its tentative minimum tax. From this amount, the corporation can subtract its Corporate AMT foreign tax credit. This credit accounts for income taxes paid to foreign countries, and its calculation may differ from the credit used for regular tax purposes.

The resulting amount is then compared to the corporation’s regular federal income tax liability for the year. The corporation is required to pay the higher of the two amounts. The Corporate AMT owed is the amount by which the tentative minimum tax exceeds the regular tax liability. If the regular tax is higher, no AMT is due for that year.

Any AMT paid by a corporation generates a Minimum Tax Credit (MTC). This credit can be carried forward indefinitely and used to reduce the corporation’s regular tax liability in subsequent years. However, the MTC cannot reduce the regular tax below the tentative minimum tax in that future year.

Filing and Reporting Requirements

A corporation with a Corporate AMT liability must report it to the IRS using Form 4626, Alternative Minimum Tax—Corporations. It is important for corporations to use the correct form for the applicable tax year, as the form and its instructions can be updated. Using an outdated form could lead to incorrect calculations.

The completed Form 4626 must be attached to the corporation’s primary federal income tax return, which for most corporations is Form 1120. The final AMT liability calculated on the form is then carried over and included in the total tax computation on the main income tax return.

Payment of this liability follows standard corporate tax payment procedures. This includes making quarterly estimated tax payments throughout the year to avoid underpayment penalties.