Q: I received a letter from the IRS saying the small lumberyard I own owes some AMT tax. My company has struggled a bit during this down economy and I don’t understand why I would owe more. Can this be right?
A: The Alternative Minimum Tax (AMT) was originally created by Congress in 1969. By eliminating certain deductions and preferential tax breaks that were often utilized by high-income individuals and corporations, the AMT was designed to guarantee that “the rich” paid their fair share of taxes. We hear in the news about the individual AMT because it is a tax gone astray of its original purpose. More and more taxpayers are subject to the AMT each year due to the lack of any provision for inflation and the many changes in the tax law since 1969. Unfortunately, Congress refuses to permanently fix the problem.
But the short answer to your questions is that the AMT can apply to businesses, too.
First, I have to make a couple assumptions: 1) your lumberyard is organized as a regular “C” corporation, and 2) you have incurred taxable losses in the last year or two. I make the first assumption since if your company is organized as a partnership, S corporation or limited liability company (LLC), the AMT would not apply at the company level. Instead the AMT impact would flow through to the owner’s return. And I make the second assumption because most of the corporate AMT problems I see are caused by limitations on net operating losses (NOLs) that are carried forward from prior years.
There are actually many adjustment and preference items that come into play in calculating AMT. Besides the NOL adjustment that I mentioned before, common causes of corporate AMT include depreciation adjustments, some mining exploration and development costs, and death benefits from corporate life insurance. Many other adjustments and preferences also exist, and you will need to take a look at Form 4626 and the related schedules and instructions to see what applies to your company.
One important consideration is that there is a qualifying small corporation exemption to the corporate AMT. If your company’s average annual gross receipts for every three-year period beginning after 1993 and ending before the current tax year total $7.5 million or less ($5 million in the first three-year period), the company is exempt from AMT. Obviously this will take a little bit of calculating, but it may be the way out of the additional tax. So take a look, and if this exception applies write the IRS and let them know. Or better, consider engaging a tax professional. Unfortunately, the AMT is so complex that it is not easily navigated alone.
By the way, while Idaho does impose a minimum $20 tax on most corporations, there is no separate Idaho AMT.
Q: I am interested in supporting several candidates in the November elections. How should I donate money to get the best tax advantage?
A: Unfortunately, tax law specifically prohibits taking a deduction for contributions made to political candidates, lobbying expenses or payments for political activities. So if you want to give money to your favorite candidate or political party, you will be supporting the cause without any tax savings. Contributions to political organizations are, however, exempt from gift tax, but this exemption is only important if you would make a large contribution exceeding $13,000 per year.
In fact, if you pay dues to a professional organization or donate to any group that conducts lobbying activities, all or part of your payment will be non-deductible. The organization you are contributing to should inform you of the portion of your payment that is used for political purposes. So read the fine print on your payment acknowledgement carefully.
One way to contribute to presidential election campaigns is to check the box near the top of your individual tax return. Both you and your spouse can contribute $3 each to help fund presidential campaigns. This is not a party- or candidate-specific donation, and it does not reduce your tax bill, but it does help to reduce the need for political fundraising – at least, that is the intent.
To ensure compliance imposed by IRS Circular 230, any U. S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation.
Peter Robbins is a partner in the Boise office of CliftonLarsonAllen, LLP specializing in tax matters for small businesses, individuals, and trusts and estates. Have a question? Email your question to email@example.com. Enter “Talking Tax” in the subject line.