Among the many paperwork burdens small business owners must endure is the filing and paying of income taxes for the business. Even if no taxes currently are due because of losses, accurately computing and tracking of tax losses is a must. And, as if the Regular Tax weren’t enough to contend with, the Alternative Minimum Tax also must be considered. The purpose of this article is to discuss those specific aspects of the AMT that can apply to small business owners.

Who is responsible for the AMT – the small business itself or the individual owner?

The answer to this basic question depends on the legal structure of the business - i.e., how it is organized under state law. Listed below are the common forms of doing business, with an explanation in each case of who is responsible for the AMT.

Sole proprietorship – if no separate legal entity is formed, the business and the individual owner are one and the same. In this case, taxes are reported on a schedule attached to the individual’s personal tax return (Schedule C), and the individual is responsible for computing and paying the Alternative Minimum Tax.

Limited Liability Company (LLC) – this type of entity is formed under state law, but for income tax purposes it is treated as a "disregarded entity." If there is only one owner of the LLC, its tax reporting is the same as if it were a sole proprietorship. If there are multiple owners, the entity is treated for tax purposes the same as a partnership (described below).

Partnership – a partnership is another form of entity created under state law. For tax purposes, its income and losses – along with its AMT items – "pass through" directly to the partners. The partnership files a tax return, but it as an entity does not pay any taxes because of this pass-through treatment.

Corporation – unless a corporation makes a "Subchapter S" election (see below) the corporate entity itself is the taxpayer. These tax-paying corporations are referred to as "C corporations." This is the one type of business entity that pays its own Alternative Minimum Tax, separate and distinct from its owners. This is done on Form 4626 – Alternative Minimum Tax—Corporations.

Subchapter S corporation – while formed as a corporation under state law just like a regular corporation, for income tax purposes if the shareholders make a "Sub S" election the entity is treated the same as a partnership for tax purposes. As such, the AMT items pass through and are picked up by the individual shareholders.

What are the AMT items that apply to small business owners?

Set forth below are brief explanations of the more common AMT items affecting small businesses.

Depreciation – property used in a business can be depreciated for tax purposes, and there are choices to be made as to which depreciation method to use. Some depreciation methods result in an AMT item while others do not, so this is an important consideration for the small business owner.

Gain or loss on sale of business property – when business property is sold or otherwise disposed of, at this point taxable gain or loss must be computed. Depending on the depreciation method that was used (see above), gain or loss for purposes of the AMT may be different from what it is for the Regular Tax.

Net operating loss (NOL) – when a business has a tax loss, in certain cases that loss may be used to generate a refund of prior years’ taxes paid, and/or it may be carried forward to be used as a deduction against future years’ taxable income. The AMT requires that the NOL be calculated differently than it is for the Regular Tax.

Qualified small business stock – a Regular Tax break applies to gain realized from the sale of stock of certain small businesses. For the AMT, this break is less favorable than it is for the Regular Tax.

Special industries – businesses in certain industries are allowed favorable tax treatment under the Regular Tax, while the Alternative Minimum Tax denies some or all of these benefits. Any of the following items in the businesses indicated can result in the AMT being paid:

Depletion allowances, mining costs, intangible drilling costs (oil and gas, mineral extraction)

Circulation costs (publishing)

Long-term contracts (construction)

Research & development/R&D (any business engaged in research)

Summary

In addition to the Alternative Minimum Tax rules that apply to everyone, small business owners have an extra set of concerns to deal with. The key to effectively planning to minimize a business’ AMT burden is: 1) knowledge of the choices of tax treatment that are available, and; 2) access to computer software to model out the resulting AMT impact of each of the choices.