The name of this tax literally comes from the way it is meant to work.  The Alternative Minimum Tax Corporate (AMT) provides an alternative way of calculating income tax.  In essence, it is a parallel tax system that determines the minimum amount of tax a corporation should pay, if the corporation is already paying at least that amount in regular taxes they won’t have to pay AMT.

How did this all come to be?  In 1969 Congress saw that people with very high incomes were taking advantage of so many deductions and tax breaks that when it came to federal income taxes they ended owing nothing!  Congress wanted to make the tax system fair and ensure that the rich were actually paying federal taxes.

Regular income tax is indexed to inflation, however the AMT is not.  Therefore as each year passes more and more middle income companies are being charged the AMT which was originally targeted at only rich companies.

Many “Patches” have been implemented by Congress over the years in an attempt to prevent the AMT from being spread to lower income companies.  Basically Congress has had to adjust the AMT exemption amount for inflation.  Unfortunately, this adjustment is only made to the patch and not to the permanent AMT exemption amount.  Therefore the budget impact of adjusting the AMT patch continues to grow with each passing year.

The budget impact for adjusting the AMT patch was $30 billion for a single year!  The most recent patch included in the 2009 recovery act is an astounding $70 billion.  Keep in mind that these dollar amounts do not actually reflect the amount of money the government will collect, but rather the amount that is added to the budget due to the continual patches made to the AMT.

The reality is until the actual permanent AMT exemption is adjusted, more and more companies will be faced with having to pay the AMT when they were never intended for smaller income companies.

Additionally the budget will continue to bear the burden of the patches Congress makes each year in an effort to limit the number of smaller companies being hit with AMT.  It is a vicious cycle that President Obama is trying to tackle head on!

Due to the fact that inflation was not indexed into the permanent AMT rules, the budget reflects a fictional Alternative Minimum Tax Corporate as well as personal amount.  Obama wants to take this fictional AMT revenue out of the budget projections.

Obama’s budget will assume that Congress will continue to protect against an inflation-related increase of the Alternative Minimum Tax Corporate from taxpayers.  This would remove over $1 Trillion over a ten year period from the budget.

Using a real, honest representation of the federal budget will certainly assist in trying to get our budget deficits under control. This may very well finally be the answer that so many companies have been seeking.  Being able to adjust not just patch the AMT will not only help our country’s deficit but may also save smaller companies untold amounts of money over the course of the next few years.