The minimum tax credit: a full benefit to future years. (Federal Taxation)by Schaum, Joy
As discussed in the General Explanation of the Tax Reform Act of 1986 (Blue Book), Congress recognized that it would be desirable to change the underlying structure of certain aspects of the AMT. Specifically, to the "extent that tax preferences reflect deferral, rather than the permanent avoidance of tax liability," an adjustment was considered necessary. If an adjustment was not put into place, regular tax deductions would be lost. For example, in the initial years of an asset's life, accelerated depreciation can generate a large regular tax deduction thereby resulting in a positive AMT adjustment. Thus, a taxpayer would pay an AMT in these initial years. However, in the following years, regular tax depreciation deductions would be less than those allowed for AMT purposes. Therefore, if the taxpayer is subject to regular tax during later years, it would, for all intents and purposes, have lost the benefit of some of its regular tax depreciation deductions generated in earlier years.
In order to eliminate this inequity, Congress provided for the MTC. Originally established, the MTC permitted taxpayers to recoup AMT resulting from deferral items as opposed to exclusion items. A deferral item is similar in nature to a timing difference (now temporary difference under SFAS 109) and represents an item that is expected to reverse in future years. Conversely, an exclusion item represents an item that is permanent in nature and is not expected to reverse over a number of years. The MTC rules, as initially enacted, applied to all taxpayers for tax years beginning in 1987. However, RRA 89 amended the MTC rules for corporate taxpayers. For tax years beginning after 1989, a corporate taxpayer is entitled to the MTC for its entire minimum tax liability. It is not required to isolate deferral or exclusion items.
The MTC can only be used to offset a taxpayer's regular tax liability. It cannot be used to reduce a taxpayer's AMT. It is clear that the MTC was created to compensate a taxpayer for any prepayment of regular tax which resulted from the AMT. Thus, the credit is only available to offset a regular tax liability that is incurred in a year subsequent to that in which the minimum tax liability arose.
In 1991, ABC Corporation's regular taxable income is $500,000. For regular tax purposes, its depreciation on tangible property placed in service after 1986 is $1,000,000. For AMT purposes, this amount is only $400,000. Consequently, ABC has an AMT depreciation adjustment of $600,000 ($1,000,000-$400,000). Assume ABC does not have any other AMT preferences of adjustments.
In 1991, ABC's regular tax liability is $170,000 ($500,000 x 34%). The additional AMT liability is $50,000, computed as follows:
The entire AMT liability of $50,000 is allowed as the MTC for future years in which a regular tax liability exists. If, for example, ABC has a regular tax liability in 1992 of $300,000, the MTC can be utilized to reduce ABC's tax bill to $250,000 ($300,000-$50,000). Moreover, if ABC changed its status from a C corporation to an S corporation in 1992, Sec. 1374(b)(3)(B) would allow the S corporation to apply its MTC carryover against any tax on built-in gains.
As you can see, the determination of a corporate taxpayer's MTC attributable to AMT incurred after 1989 is relatively straightforward. Unfortunately, this is not the case for the earlier years of corporate taxpayers or for all years for noncorporate taxpayers.
Complicating the Calculations
In order to calculate the MTC, a corporate taxpayer in years beginning prior to 1990, and a noncorporate taxpayer, must make a "with and without" computation. The "with" computation is equal to the taxpayer's actual AMT. The "without" computation is equal to the taxpayer's AMT without regard to its deferral items (i.e., computed using exclusion items only). The difference between these two AMT figures is the taxpayer's MTC. Thus, the computation is designed to isolate the portion of the taxpayer's TABLE DATA OMITTED
AMT that is due to deferral preferences only, because, as mentioned earlier, only these items give rise to the MTC.
To visualize the "with and without" computation, refer to the example provided above. The facts are the same except ABC has now made a charitable deduction of appreciated property, an exclusion item. The preference amount is $450,000. The calculation of the MTC is displayed in Figure 1.
It is important to note that because ABC's AMT liability is due, in part, to exclusion items, its MTC of $120,000 is less than ABC's AMT liability of $140,000.
Another complicating factor is the effect of the net operating loss (NOL) on the MTC calculation. The AMT NOL is determined based upon what the taxpayer's NOL would be if its tax liability was computed using the AMT provisions. The AMT NOL is utilized in the MTC "with" calculation. However, there is some confusion as to whether the regular tax NOL, without reduction for exclusion items, can be used in the "without" calculation. Sec. 53(d) provides for the exclusion items that must be taken into account when preparing the "without" computation. This section does not refer to the AMT NOL. Accordingly, some practitioners and commentators have suggested that this lack of specificity in the statute would, in effect, allow a taxpayer to utilize the regular tax NOL in the "without" computation. This would provide for a greater MTC than if exclusion items were removed from the NOL. Unfortunately, the instructions to Form 8801, "Credit For Prior Year Minimum Tax," seem to contradict this approach. Therefore, any taxpayer choosing to apply the regular tax NOL without removing exclusion items should, at minimum, consider some type of disclosure under Sec. 6662.
The MTC provides less than total relief from the AMT, since it does not allow a noncorporate taxpayer, and a corporate taxpayer in yars prior to 1990, to recoup the amount of AMT paid on account of exclusion items. Further, the MTC does not provide complete relief from the AMT because it does not take into account the time value of money (i.e., the MTC can only be recovered in future years and it cannot be carried back). Therefore, for those taxpayers who expect to be in an AMT situation in the future, the MTC possesses little value.
On rare occasions, accumulated MTCs may "disappear," even though such credits have not been utilized to offset a taxpayer's regular tax liability. Further, a greater amount of MTCs may be eliminated than those that are actually utilized in reducing a regular tax liability. The Blue Book states that this appearance occurs when both of the following circumstances exist:
1. "Taking into account solely the deferral items, alternative minimum taxable income is less than regular taxable income;
2. Due to the exclusion items, the taxpayer would incur minimum tax liability for the year if alternative minimum taxable income were treated as equal to regular taxable income with respect to the deferral items."
Another significant limitation to be aware of is described in Sec. 53(c). This section provides that the MTC may not reduce the regular tax below the tentative minimum tax. Tentative minimum tax is defined in Sec. 55(b) as "20% (24% in the case of a taxpayer other than a corporation) of so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount, reduced by the alternative minimum tax foreign tax credit for the taxable year."
This limitation can be quite harsh, since it does not allow a taxpayer the complete benefit of its MTC. This can result when a taxpayer's regular tax liability is slightly greater than its tentative minimum tax. In such an instance, the MTC could only reduce the regular tax liability down to the tentative minimum tax. Any excess MTC would be carried forward and the taxpayer would have to wait at least one more year before utilization. Since the AMT can result in a tax that is similar, if not greater than, the regular tax, it may prove difficult to completely utilize the MTCs. Over time, this would surely have a diluting effect on the benefit of the MTC.
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