The Corporate Alternate Minimum Tax
The United States taxation system is one of the most complicated in the world. The reason behind this complication is that the US has a parallel system of taxation known as the alternate minimum tax.
The existence of this alternate makes planning quite complicated since if corporations do not understand the system correctly, they may make the wrong choices and end up paying much more in the form of alternate minimum tax.
The details regarding this parallel system of taxation have been explained in this article.
What is Alternate Minimum Tax?
The alternate minimum tax is a parallel system of taxation. In simpler words, this means that it is a separate method that is used to calculate the tax liability and the taxable income along with the regular method. Hence, in the United States, corporations are expected to calculate their tax liabilities under both systems. Then, they are supposed to pay the higher of the two amounts.
Hence, if alternate minimum tax is higher than the regular tax calculated, the company has to pay the alternate minimum tax. The main purpose of this act is to ensure that wealthier taxpayers do not use legal loopholes to reduce their tax liability to a bare minimum.
However, this tax was made redundant to a large extent last year by Donald Trumps Tax Cuts and Jobs Act. Even though most corporations within America are no longer required to pay the Alternate Minimum Tax, this system is still followed in different parts of the world. This is the reason why it is important for any student of taxation to know the basics of alternate minimum tax.
The proponents of the minimum alternate tax are upset that the act has been repealed. According to them, this act was in place to ensure that corporations such as Amazon could not get by paying lower taxes than many individuals.
How is the Alternate Minimum Tax Calculated?
The alternate minimum tax calculations are also similar to normal tax calculations. This is in the sense that the expenses are subtracted from the income to find the taxable income. However, in the case of AMT, the subtractions are limited. This means that not all the deductions which can be considered in the case of regular tax calculations can be considered for the purpose of calculating alternate tax.
In most parts of the world, the system defines an alternate mechanism to calculate important expenses, such as depreciation. Also, the tax treatment of controversial deduction, such as stock-based employee compensation, is also different in the case of alternative minimum tax.
The end result of this exercise is that an alternate tax income is arrived at. This alternate tax income is then multiplied by the alternate tax rate to arrive at the alternate tax bill. The alternate tax bill is then compared with the regular tax bill, and the higher of the two is payable by the corporation. This means that if the organization has a tax liability of $2 million in regular taxes and $1.8 million in regular taxes, they would have to pay the higher amount, which is $2 million.
The Problems with Alternate Minimum Tax
The alternate minimum tax is a good mechanism to ensure that the corporations are forced to pay their fair share. However, it also has many drawbacks, some of which have been listed below:
- The alternative minimum tax system is a recordkeeping nightmare. This is because, under this system, every corporation is supposed to keep two entries of each transaction. This creates a problem in decision making as companies are not sure which tax they will actually end up paying.
The problem becomes even more complicated when small companies are taken into account. The minimum alternate tax is generally applicable to companies that have a high turnover. Hence, companies whose turnover hovers around the cut-over mark are not really sure about which system of tax will be applicable to them.
- The government also has to spend a lot of time and money in order to ensure that the taxpayers have paid their taxes correctly as per the alternate minimum tax rules. Studies have shown that the entire system only generates about $40 billion in additional revenue. However, it costs the government almost as much since it increases the need for audits and policing manifold.
- The alternate minimum tax disallows many legitimate exemptions, such as credits for taxes paid to state governments or to foreign governments. In the case of minimum alternate tax, this federal government basically disregards the treaty with other governments in order to collect more taxes. This has often been criticized as short term thinking since it causes the shifting of the tax base to countries with better laws.
- Projecting the outcome of tax planning becomes very complicated in the case of alternate minimum tax. This is the reason that an entire group of people viz. accountants, consultants, and lawyers have to be deployed for this purpose. This costs the organization a lot of money to ensure compliance with the law.
The bottom line is that the alternate tax system is a relic of a bygone era. It is complicated and expensive to implement, which severely limits its utility.
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- Why must corporations be taxed?
- Different Forms of Corporate Taxation
- How Corporate Taxes Impact Corporate Behaviour?
- Is Corporate Tax Progressive?
- The Rise of Flat Tax
- Understanding Tax Terminology: Tax Base
- Understanding Tax Terminology: Tax Rates
- Arguments in Favor of Tax Competition
- Arguments against Tax Competition
- Tax Co-operation: A Primer
- Elasticity of Taxes
- Strategies Used by American Companies for Tax Avoidance
- How Corporate Dividends are Taxed?
- Capital Gains Taxes
- State Corporate Taxes
- A Primer on Tax Deferral
- The Corporate Alternate Minimum Tax
- Sales Tax and Use Tax in the United States
- Why Amazon and Netflix Pay $0 in Corporate Taxes?
- How are Losses Treated in Corporate Tax?