Avoiding the Alternative Minimum Tax

What the Alternative Minimum Tax Is

The current marginal income tax system was designed to fairly levy taxes on US citizens. However, there are times when this progressive system becomes inadequate for properly assessing the amount of taxes paid by individuals and corporations. This is where the Alternative Minimum Tax comes in.

This tax differs from the normal income tax system, as it has its own rules of the reduction along with its own tax rate. While the rules do resemble those used in the income tax system, there are also plenty of notable differences. These differences include a provision that allows corporations complete exemption from the AMT. It also contains provisions that allow individuals who act as sole proprietors to benefit from a number of tax savings from the business activities, but none-the-less do not allow their complete exemption from the AMT.

Who Benefits

Small business corporations usually benefit the most from the Alternative Minimum Tax. These corporations serve as separate entities from their owners and operate under the corporate laws of the state of their incorporation. Given their status as a separate entity, small business corporations file and pay their own taxes. However, the Alternative Minimum Tax, along with income and losses, is the responsibility of the shareholders or the owners of the corporation.

While the vast majority of corporations are required to pay taxes through the Alternative Minimum Tax, it is possible for small businesses to gain a complete exemption of AMT provided they meet the stringent requirements necessary for qualification. This exemption is determined by examining your business’ gross receipts. Businesses operating as a small corporation with gross receipts totaling $5 million or less each year will initially qualify for complete exemption as a small business corporation. However, the IRS looks at the average gross receipts over a three-year period. Companies that meet the initial qualifications may be allowed to retain that qualification if the average gross receipts rise by a small amount.

Keep in Mind

Your current business entity has a definite effect on how you will be affected by the Alternative Minimum Tax. When you first start a business, you have control over the legal status that business operates under. If you are currently a sole proprietor, changing your status to a corporation will enable you to take complete advantage of the Alternative Minimum Tax to maximize your tax savings. Of course, it may take both time and money to become incorporated in the state your company operates within.

Qualifying for complete exemption from paying the Alternative Minimum Tax depends largely on the amount of taxes your business is currently paying. You may want to look at your current tax burden in addition to the costs of changing your business entity for small business corporation and weigh those against possible AMT exemption and other tangible benefits. In other words, if the cost-to-benefit ratio points in your favor, then it’s most likely beneficial for you to change your business entity to capitalize on the exemption benefits.

Avoiding the Alternative Minimum Tax is just one way of minimizing your overall tax bill at the end of the year. However, it can also be a fairly complicated process that requires a fair amount of prior planning in order to best take advantage of the situation. For example, you may have to consider timing your capital gains to avoid additional taxes, exercised incentive stock options and carefully itemized expenses for production purposes. Also keep in mind that there are plenty of other tax benefits that may go unnoticed unless you consult with an experienced tax professional. A professional can inform you about current and upcoming tax benefits that can possibly go a long way to helping you and your corporate entity enjoy lower tax rates.

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