October 2001
The Corporate Amt in Review
By Dennis J. Gaffney and Donald V. Saftner
The Tax Reform Act of 1969 introduced a minimum tax to ensure that high-income taxpayers paid at least a modest amount of income tax. The effectiveness of the minimum tax can be evaluated by tracking significant trends in the corporate alternative minimum tax (AMT) in recent years.
The latest year for which official data is available is 1997. Statistics of income (SOI) data is compiled on a sample basis in the Treasury Department’s Statistics of Income: Corporation Income Tax Returns. This data indicates that either the corporate AMT is becoming less significant or corporations have become more adept at managing their AMT liabilities. Most likely, some combination of both is at work.
The corporate AMT is probably less significant today because several accounting-related provisions enacted in the 1980s are now firmly in place. In addition, the dramatic growth in the number of S corporations in recent years has meant that C corporations that would have been subject to the corporate AMT have not been.
SOI Data
Although the SOI data from 1990 and 1997 are not perfectly comparable, $8.1 billion of corporate AMT was due in 1990, whereas only $3.9 billion was due in 1997, representing a 52% decline over the eight-year period. While the corporate AMT has affected fewer corporations and produced decreasing amounts of tax revenue in recent years, just the opposite is true for the individual AMT. A July 2000 report of the Treasury Department’s Office of Tax Analysis indicated that the number of individuals subject to the AMT will increase by 30% annually between 2001 and 2010, and that the number of individual AMT taxpayers will almost double between 2000 and 2003.
General Structure of the AMT
Both the individual and corporate AMT systems are separate from the regular income tax (RIT) systems. At the same time, both AMT systems depend on, and operate in conjunction with, the RIT systems. Thus, the AMT systems are often described as being “parallel” to the RIT systems.
Corporate AMT. The corporate AMT for a particular tax year is the excess of the tentative minimum tax (TMT) over the regular tax (RT) for that year. Thus, the corporate AMT is assessed only on corporations subject to RIT. For example, since S corporations are not subject to RIT, they are not subject to the corporate AMT. Regulated investment companies (RICs) and real estate investment trusts (REITs) exempted from the RT by IRC Subchapter M are likewise not subject to the AMT. Nevertheless, these entities apportion certain items between themselves and their shareholders or holders of beneficial interests for purposes of assessing a minimum tax at the shareholder or beneficiary level.
Modifications. Since its introduction in 1969, the corporate AMT has twice received major amendments. The 1986 amendments involved structural changes, whereas the 1997 amendments (part of the Taxpayer Relief Act of 1997) involved the elimination of the minimum tax for small corporations. While data is not yet available, the 1997 change will relieve many corporations of having to perform the numerous threshold computations necessary to ascertain whether they are subject to the AMT.
Because of the many changes in the minimum tax structure over the years, meaningful long-term comparisons are difficult. The seven-year period from 1991 through 1997 saw no structural changes to the corporate AMT, however, and thus is helpful for study.
The Basic SOI Data
The data presented in Exhibit 1 involve aggregate statistics and, as such, have inherent limitations. For example, not all tax returns reported in the first row for a particular year involve corporations having an AMT liability for that year. A corporation having an AMT liability in 1993 but not in 1994 would have an “AMT item” in 1994 if it claimed a credit for the 1993 AMT paid against its 1994 RIT liability.
Another limitation of the SOI data is that at least some of such corporations are not regular AMT payers; rather, certain events converged to make them one-time AMT payers. It would be interesting to know what portion of the corporations subject to the AMT in a given year are “regular” AMT payers.
Observations
The second row of Exhibit 1, “Returns for corporations not S corps, REITs, or RICs,” identifies corporations that could conceivably be subject to the AMT. The next row is the aggregate AMT paid by corporations with AMT items. As Row 3 indicates, the total AMT paid has decreased by about 26% from 1991 to 1997. In absolute dollars, the total AMT paid in 1997 was less than $4 billion. The fourth row details the total TMT, which has decreased dramatically. In 1991, the TMT was $13.2 billion; in 1997 it was $7.3 billion, a decrease of about 45%.
The fifth row of Exhibit 1 sets forth the aggregate net income of corporations reporting AMT items. Net income (NI) is essentially a corporation’s taxable income before special statutory deductions (e.g., the dividends received deduction). Technically, NI is defined and described in the 1995 SOI as “the difference between gross receipts and the ordinary and necessary business deductions allowed by the Code.”
Row 6 details the amount of credit against the RT for the AMT paid in previous years, which is claimed by corporations not subject to the AMT for the year in question. Previous AMT amounts paid are credited against a corporation’s RT when the corporation computes an excess of its RT over its TMT in a particular year. The absolute and relative increases in this statistic are impressive: In 1991, this credit against the RT was $1.5 billion, whereas in 1997 it was $4.1 billion, an increase of 172%.
Analysis
Exhibit 2 summarizes several significant relationships involving the corporate AMT. The first row of Exhibit 2 indicates that the number of corporations with AMT items relative to the number of corporations having the potential for a corporate AMT has decreased from 1.46% in 1991 to 1.11% in 1997, a decrease of 24%.
The second row illustrates the average AMT paid by corporations reporting AMT items. Because some corporations may report AMT items in a given year without incurring an AMT liability in that year, the average AMT for those corporations incurring an AMT liability is not directly available from the data. The average AMT for corporations reporting AMT items was about $156,000 in 1997.
The statistic in the third row of Exhibit 2 provides a measure of an effective tax rate by dividing the aggregate TMT of corporations reporting AMT items by the NI of those corporations. Note that, for a corporation incurring an AMT liability, TMT is larger than RT. In 1997, it was about 9.3%, less than half the 19.4% computed for 1990, and about 44% less than the 16.4% computed for 1991.
The last row details the relationship between the AMT paid by corporations subject to the AMT in a particular year and the credit against the RT liability for AMT paid in previous years by corporations not subject to the AMT in that year. In 1991, the AMT paid by some corporations was about three and one-half times larger than the credit against RT claimed by other corporations. In 1995–1997, however, the credit against the RT for previous years’ AMT paid by some corporations exceeded the AMT paid by other corporations. In other words, the corporate AMT structure, on an aggregate basis, has produced a net outflow of federal revenues during these three years.
The Diminishing Corporate AMT
The statistics above suggest that the corporate AMT is becoming a less important aspect of the U.S. corporate tax system. It has probably even become less significant since the small corporation exemption took effect in 1997. Just how much less significant remains to be seen, but once statistics are available, the number of corporations reporting AMT items will most likely decrease dramatically.
The decreasing amounts of AMT paid by a decreasing number of corporations suggest that the many provisions designed to prevent aggressive tax accounting practices in the 1980s are probably working. Moreover, for the most recent years studied, the corporate AMT is not producing any net federal revenues. In light of this fact—and considering the overall complexity—it may be time to scrap the corporate AMT altogether.
Editor:
Robert H. Colson, PhD, CPA
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