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Corporate alternative minimum tax (AMT) is a tax designed to insure that corporations with significant “economic” income pay some minimum level of tax. Basically, tax benefits provided under the regular tax law are minimized and/or eliminated under the AMT computations. There are three main reasons why corporations can become AMT payers: (1) a high level of investment in assets such as equipment and structures, and/or (2) low taxable income due to cyclical downturns, strong international competition, or other factors, and/or (3) low real interest rates, which encourage firms to invest, thus making their deductions more "depreciation intensive" relative to deductions for interest payments By expanding the basis for computing the AMT tax, many corporations find themselves paying more in tax. To increase the tax base, the rules add back certain “preference” items. Corporations must compute their regular tax at 35% and their AMT at 20%, and pay the higher of the two. In 1997, AMT was repealed for small corporations, which have average annual gross receipts for the 3 prior tax years less than $7.5 million ($5 million if the corporation had only 1 prior tax year). AMT can reduce investment spending in one of two ways. First, AMT filers pay a higher average tax rate and consequently generate less internal cash flow than they would under the regular tax. This, in turn, may curb investment by firms with impeded access to capital markets. Second, the AMT affects the marginal tax rate on capital and hence can discourage investment by raising the cost of capital or the "hurdle" rate which a new project must meet before it will be undertaken. Under AMT, depreciation has historically been computed using a longer recovery period and a slower recovery method than allowed under MACRS. Currently, the law requires a leasing company to compute the excess depreciation between 200% DB versus 150% DB over the MACRS prescribed life. Depreciation for capital equipment is by far the major reason that corporations become AMT payers. AMT dates back to the Tax Reform Act of 1986. Congress, at the time, felt that too many corporations were reporting large book income and paying no tax. Several leasing companies, such as GE and IBM, had been able to reduce their AMT taxable income through extremely aggressive tax structures such as safe-harbor leasing, Tax Benefit Transfers and Foreign Source Income credits. Most people do not know this, but I credit Ralph Nader for developing the white paper that led to this law. Currently, companies affected by the AMT have a disincentive to make capital investments. This is important right now because the economic slowdown we are experiencing is primarily the result of lower corporate capital investment over the last 6-9 months. One of the quirks of AMT is that its liabilities rise during recessions. That is because the accumulated depreciation from past investments triggers an AMT liability for many companies when their profits fall due to lower sales. But the law also allows corporations a credit for past AMT payments in years when they have no AMT liability. Some tax analysts believe that AMT is pro-cyclical. That is, it exacerbates the business cycle by raising corporate taxes during economic downturns and lowering them during upturns. As a consequence, it reduces capital investment during recessions and increases it during expansions. The effect is to exaggerate the boom-and-bust economic cycle. Tax accountants believe that corporate AMT handicaps U.S. business by increasing capital costs and thus provides an edge to foreign competitors. The National Association of Manufacturers has often been quoted in saying that AMT discourages investment because companies with large net operating losses cannot deduct them. Although this larger amount of tax becomes a carryforward credit, many taxpayers never get to claim it within a meaningful time frame. For these taxpayers, the AMT becomes either a permanent tax increase (relative to a regular taxpayer) or an interest-free loan to the government. That is why many leasing corporations are currently looking forward to the repeal of AMT. This tax credit, called the Minimum Tax Credit (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. Note that the MTC 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). That is another reason why leasing companies and other major US corporations want Congress to create a carryback provision. |
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