Cream of the Crop 1/Cream of the Crop 1.iso/BUSINESS/SBA62.ARJ/FSBA.EXE/F102.SBE

Text File | 1992-04-30 | 6KB | 119 lines

@110 CHAP ZZ

                  ┌─────────────────────────────────┐
                  │     ALTERNATIVE MINIMUM TAX     │
                  └─────────────────────────────────┘

Since the maximum individual and corporate tax rates were reduced to
28% and 34% (theoretically), respectively, in 1988, many people mis-
takenly believe that tax planning is no longer that important a part of
personal and business tax planning.  For many taxpayers, this is not
the case.  In fact, the much narrower differential between the regular
tax rate and the Alternative Minimum Tax rate (of 24% for individuals
and 20% for corporations) than existed under prior law now makes the
Alternative Minimum Tax ("AMT") a potential trap for many unwary tax-
payers.  To avoid the AMT will often require much more complex and de-
tailed tax planning than was necessary before the 1986 Tax Reform Act
changes.

Like the old version of the AMT, the current version is, in effect, an
alternative tax system that exists alongside the regular income tax,
complete with different (more restrictive) rules as to what is taxable,
what is deductible, and a different (slower) set of depreciation sched-
ules.  Each year, a taxpayer must compute taxable income under the reg-
ular and AMT systems, apply the different tax rates and exemptions to
each, and if the AMT is greater than the regular tax, the taxpayer must
pay the higher amount.

The new AMT has much larger and sharper teeth in it than its relatively
tame pre-'86 Act predecessor, however.  The new AMT tax rate is closer
to the regular income tax rate, which means that relatively minor
differences in regular taxable income and alternative minimum taxable
income can result in AMT being imposed.  The potential problem is ex-
acerbated by the fact that the AMT exemption of $40,000 is phased out
at income levels above $150,000 for corporations and individuals fil-
ing joint returns (the exemption is $30,000 and begins phasing out at
$112,500 for single individuals).  In addition, an increased number of
deductions are disallowed under the AMT.

Differences between regular taxable income and alternative minimum
taxable income are called "tax preferences."  However, not all prefer-
ences are created equal.  Some preferences, like itemized deductions,
that permanently reduce taxable income, are called "exclusion pref-
erences."  Others, such as accelerated depreciation deductions for
regular tax purposes, result only in a deferral of a taxpayer's tax
liability and not a permanent tax reduction.  The latter are called
"deferral preferences."

To the extent you or your corporation ever incurs an AMT liability on
account of deferral preferences (but NOT exclusion preferences--except
in the case of a corporation), the AMT that is paid may eventually
become refundable in a subsequent tax year when the timing differences
reverse themselves.  This is done by claiming an "alternative minimum
tax credit" in a subsequent year.  Thus planning becomes extremely
complex--not only do you want to minimize or eliminate any potential
AMT liability in a given tax year, but (except for a C corporation)
if you do have to pay AMT you will want to try to structure your tax
situation so that most or all of such AMT liability results from defer-
ral preferences, rather than exclusion preferences, so that there will
be a chance to recoup some or all of the AMT via the AMT credit in a
future year.

Conceptually, the AMT can be illustrated by the following general
outline (for a married couple filing a joint return):

        Regular taxable income (1991):    $  80,000

        Plus or minus various adjust-
        ments for deferral preferences
        (depreciation, etc.):               +10,000

        Plus various exclusion prefer-
        ences, such as state income tax,
        personal exemptions, and the
        excess of percentage depletion
        over cost:                          +55,000
                                           --------

                     AMT Income:           $145,000

                     Less: AMT Exemption    -40,000
                                           --------

                     AMT Taxable Income    $105,000
                                           ========

        Regular tax on $80,000 taxable income  =  $17,980

        Tax on AMT Taxable Income (at 24% rate)=  $25,200

       ┌────────────────────────────────────────────────────────┐
       │Since AMT tax of $25,200 is $7,220 more than the regular│
       │income tax, an AMT liability of $7,220 would be added to│
       │the regular income tax liability of $17,980 in the above│
       │example.                                                │
       └────────────────────────────────────────────────────────┘

The AMT is humongously complex, so that for the layman, the best advice
we can give you is to seek help from a competent tax professional early
enough in the tax year to try to make the best of a potentially ugly
tax situation involving the AMT.  Waiting until the following April 15
to begin your tax planning for the preceding tax year simply will not
suffice.  The AMT thus makes careful tax planning much more important
than many people would expect in this age of relatively low income tax
rates.

@CODE: CA
California also has its own, very similar, version of the alternative
minimum tax, but applied at an 8.5% tax rate.  Credits and preferences
are somewhat different than federal.  The tax is computed on Schedule P
of Form 540.

@CODE:OF
@CODE: LS
In @STATE, the rules on how to compute the AMT are hidden in
the Confidential State Regulations.  Failure to properly compute the
AMT is grounds for immediate liquidation by the Secret Tax Police.

@CODE:OF