Recent amendments to the corporate alternative minimum tax (“AMT”) have simplified the business tax preparation and filing process, and have created opportunities to re-inject cash back into corporations.
Prior to the 2017 Tax Cuts and Jobs Act, corporations were forced to conduct two calculations on corporate income tax. The first calculation determined the tax burden under regular corporate income tax requirements. Then, corporations were required to calculate income tax again under the AMT guidelines. Once completed, corporations had to pay the higher of the two.
The corporate AMT is designed to ensure that corporations pay at least a minimum tax amount. This is done by establishing limitations on—or eliminating entirely—certain deductions, credits, and other tax preference items. Under prior regulations, corporations received a minimum baseline tax credit for any AMT the company paid previously. This credit would be applied against regular tax in the future if the regular tax was greater than AMT tax, but was limited to the AMT tax amount in that year; therefore, the AMT essentially acted like a pre-payment. As such, it could take years to recover the AMT “pre-payment” represented by the minimum tax credit.
Under the 2017 tax act, AMT tax was repealed and no longer exists, as of December 31, 2017. Under the new law, AMT credit carryforwards may still be used to offset a corporation’s regular tax liability in any year. Additionally, the new law allows for a partial refund of AMT credits. Read on to discover how your business may benefit.
Details About the New Corporate AMT
The 2017 Act repeals the AMT regime for tax years beginning after December 31, 2017. For tax years beginning in 2018, 2019, 2020, and 2021 the AMT credit carryforward can be utilized to offset regular tax with any remaining AMT carryforwards eligible for a refund of 50%. Beyond that, any remaining AMT credit carryforwards will become fully refundable beginning in the 2022 tax year.
These revisions have streamlined the calculation process and created provisions to issue refunds for prior-year AMT paid directly to corporations, not carried forward in the form of future credits. In short: companies are now able to offset regular tax liability with previously paid AMT tax credit and receive refunds that directly inject capital back into the business.
What This Means for You
For companies with existing deferred tax assets for prior AMT credit carryforwards, the final bill would provide your business a means of realizing the deferred tax asset without generating future income that is subject to tax. The benefit associated with the reversal of valuation allowances against existing AMT credit carryforwards would be recognized discretely in the period in which the change in judgment occurs.
While recent startup companies that have been operating at a loss may not benefit from this new AMT, if yours is a medium to large corporation that has been profitable and paid AMT tax for years, the refund amounts in question can be huge.
Speak with your CPA to discuss filing the proper tax returns to claim usage of the AMT credit and to request applicable refunds. Evaluate your current plan for business tax preparation and discuss whether your currently recorded AMT credit carryforwards should be reclassified to a current or long-term receivable. Your tax partner should also get to work determining the implications of the AMT repeal on your ASC 740.
Changes to the AMT are a win/win situation for corporations. Refunds immediately nudge up the profitability and value of public companies, demonstrating capital increases on both financial statements and balance sheets. For smaller businesses, this capital injection can provide much-needed resources to fund important upcoming projects. Take advantage of these opportunities as soon as possible. After all, this is a refund of your corporation’s money. You are entitled to it.