Chris Paris, partner in charge of the Moss Adams office in Santa Rosa, discussed the alternative minimum tax.
The AMT, launched by Congress in 1969, is a parallel tax system intended to make people with high incomes pay at least a fair minimum tax, even if they had deductions that sharply reduced or even eliminated their taxes under regular filing guidelines.
Under the 2016 AMT, exemption amounts are $53,900 for single taxpayers, $83,800 for married taxpayers who file jointly and $41,900 for married taxpayers who pay separately. The AMT, which can hit many business owners especially when they sell a business, is calculated on Form 6251 and can result in thousands of dollars of additional taxes.
Where does the alternative-minimum tax affect businesses the most?
CHRIS PARIS: The primary area where we see it the most is a lot of business owners hold their business through flow-through entities such as an S corporation or LLC. All the income that flows through from those entities goes to them personally as the business owner.
The big issue is high state income taxes, such as in California and New York.
How does the AMT hit business owners subject to high California state taxes?
PARIS: You don’t get the benefit of being able to deduct state income taxes (with the AMT). That’s the major issue we see with business owners.
That kicks them into the AMT?
PARIS: It frequently does, yes. With many middle-market clients, the business owners are in AMT because of income flowing through from the business. They don’t get the benefit of deducting state income taxes.
For such folks to avoid the AMT, they need to go back to the underlying business and increase expenses to the business?
PARIS: Exactly. Use advantageous accounting methods. Accelerate depreciation deductions. Accelerate prepaid expense deductions. Defer income to the extent possible. Closely monitor whether you are going to be in AMT every year. In November or December, run tax projections to determine if you’re in AMT or not.
If the subsequent year is going to have a lot less income or a lot more income where you blow through AMT, defer paying California state income taxes until the subsequent tax year.
If the business owner is not going to be in AMT, what should s/he do?
PARIS: Pay everything possible in the current year because you’re getting the benefit of the deduction.
These business owners should do a Form 6251 every year?
PARIS: Yes. Do a Form 6251 and tax projections to monitor whether or not they’re going to be in AMT. If they’re not in AMT, they should pay everything.
If they are in AMT, they should delay payment of California state income taxes instead of paying it before year-end. Pay it next year, say on Jan. 1, and reevaluate everything next year. California state income taxes are the big thing. Property taxes are another that you don’t get the benefit of in AMT. Depreciation differences also affect AMT.
AMT does not allow these writeoffs?
Does the AMT hit a lot more taxpayers now than it was intended for?
PARIS: Absolutely. The idea behind the alternative minimum tax is for certain taxpayers who are taking all these deductions and they have a bunch of tax-exempt income, but not exempt from AMT, we’re going to make those folks pay some sort of minimal tax amount so they can’t avoid paying income tax altogether. A lot of provisions in AMT haven’t been indexed for inflation.