What Is the Alternative Minimum Tax for Corporations?

The corporate Alternative Minimum Tax (AMT) is a parallel tax system existing alongside the regular federal income tax. Its purpose is to ensure large, profitable corporations pay a specified minimum amount of tax, regardless of deductions claimed under the regular tax code. Revised by the Inflation Reduction Act of 2022, the AMT applies to tax years beginning after December 31, 2022.

Affected corporations must calculate their tax liability twice: once under regular tax rules and once under AMT rules, paying the higher amount. This prevents companies with substantial profits on their financial statements from lowering their tax liability below a set floor.

Determining Corporate AMT Applicability

A corporation is subject to the AMT if it qualifies as an “applicable corporation,” a status determined by income. The primary threshold is for a corporation whose average annual adjusted financial statement income (AFSI) exceeds $1 billion over a three-consecutive-tax-year period. To determine applicability for 2025, for instance, a company averages its income from 2022, 2023, and 2024.

The income test is based on AFSI, which is derived from a company’s financial statements. For corporations that are part of a group of related entities treated as a single employer, the income of all members is aggregated to determine if the $1 billion threshold is met. This rule prevents companies from avoiding the tax by splitting operations across multiple corporate entities.

A lower threshold applies to U.S. corporations that are part of a foreign-parented multinational group. The U.S. corporation is subject to the AMT if its own average annual AFSI is $100 million or more, provided the international group it belongs to meets the $1 billion income test. This provision ensures U.S. subsidiaries of large global companies are subject to the minimum tax.

Certain entities are exempt from the corporate AMT, including S corporations, where income is taxed at the shareholder level. Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITs) are also exempt. These entities have tax structures that require them to distribute most of their income to shareholders, who then pay the tax.

Calculating Adjusted Financial Statement Income

The calculation for the corporate AMT begins with Adjusted Financial Statement Income (AFSI). The starting point is the net income or loss from a corporation’s Applicable Financial Statement (AFS), such as an audited statement filed with the SEC on Form 10-K. This “book income” figure is then modified through a series of adjustments.

A significant adjustment relates to depreciation. Corporations must add back the depreciation expense claimed on their financial statements and then subtract the depreciation deductions allowable for tax purposes. This is because tax rules often permit accelerated depreciation methods.

Adjustments for income taxes are also necessary. Any federal income taxes deducted on the financial statement must be added back to the income base. For foreign income taxes, corporations can either deduct them when calculating AFSI or elect to claim a foreign tax credit, which is applied later.

The treatment of certain income items also requires modification. For instance, interest from tax-exempt bonds, which is excluded from regular taxable income, may need to be included when calculating AFSI. This aligns with the AMT’s goal of creating a broader, more comprehensive income base. The rules ensure that income that escapes regular taxation is captured for the minimum tax calculation.

Specialized adjustments apply to other areas. For companies with defined benefit pension plans, the AFSI calculation disregards the income or expense recorded on the financial statement and instead accounts for the amount of contributions made to the plan. This substitutes an accounting entry with a cash-flow-based measure.

Finally, the use of net operating losses (NOLs) is limited within the AFSI calculation. While financial statements may account for NOLs differently, for AMT purposes, NOL carryforwards that can be used to offset AFSI are limited to 80% of the income. This prevents a corporation from using large past losses to completely eliminate its current minimum tax liability.

Computing the Tentative Minimum Tax

After determining its final Adjusted Financial Statement Income (AFSI), a corporation calculates its Tentative Minimum Tax (TMT). The AFSI is multiplied by a flat tax rate of 15%. This calculation establishes the baseline minimum tax liability before any credits are applied.

A corporation can reduce its TMT by claiming the Corporate AMT Foreign Tax Credit (FTC). This credit is for foreign income taxes paid on income earned from sources outside the United States. The purpose of the FTC is to prevent double taxation on the same income.

The calculation of the allowable AMT Foreign Tax Credit is based on the amount of foreign taxes paid. However, it cannot exceed the U.S. AMT liability attributable to the foreign-source income. The final TMT is the amount remaining after allowable foreign tax credits are subtracted.

Final AMT Liability and Minimum Tax Credits

To determine the final tax obligation, a corporation compares its Tentative Minimum Tax (TMT) with its regular tax liability for the year. The final AMT liability is the amount by which the TMT exceeds the sum of the corporation’s regular federal income tax and its liability for the Base Erosion and Anti-Abuse Tax (BEAT).

For example, if a corporation’s TMT is $15 million and its regular tax liability (plus any BEAT) is $12 million, it has an AMT liability of $3 million. This amount is paid in addition to its regular tax, bringing the total federal tax payment to $15 million. If the regular tax were higher than the TMT, the corporation would owe no AMT for that year.

Any AMT paid by a corporation in a given year generates a Minimum Tax Credit (MTC) of the same amount. In the example above, the $3 million of AMT paid creates a $3 million MTC. This credit can be carried forward to future years indefinitely.

This MTC can be used to reduce a corporation’s regular tax liability in a subsequent year. A limitation is that the credit can only be claimed in a year when the corporation’s regular tax is higher than its TMT. The MTC cannot be used to reduce the regular tax liability below the TMT for that future year, ensuring the AMT paid serves as a prepayment of future regular taxes.

Filing and Reporting Requirements

Corporations must calculate and report the AMT using Form 4626, Alternative Minimum Tax—Corporations. This form guides the taxpayer through the calculations to arrive at AFSI and compute the final tax liability.

Form 4626 must be attached to the corporation’s primary annual income tax return, which for most corporations is Form 1120. The submission of Form 4626 is required for any year an applicable corporation is subject to the AMT, and may be required even if no AMT is ultimately due.

Compliance requires corporations to maintain detailed documentation to support the adjustments made to derive AFSI. This includes tracking differences in depreciation, pension contributions, and foreign taxes. A running schedule of any Minimum Tax Credit (MTC) generated, used, and carried forward must also be maintained.