Headliner Volume 49
June 13, 2003

Some small corporations have been reporting and paying alternative minimum tax (AMT) for which they are not liable. AMT was repealed for qualifying small corporations for tax years beginning after December 31, 1997, but some of these businesses continue to compute and pay AMT on Form 1120, U.S. Corporation Income Tax Return. The IRS is committed to alleviating this unnecessary burden on small businesses through education about the AMT exemption rules.

As part of IRS education efforts, letters were mailed out on May 30, 2003, to small corporations who have filed returns reporting and paying AMT, but may be exempt.

A small corporation qualifies for the AMT exemption if:

• The current tax year is the corporation's first year of operation; or
• The corporation's average annual gross receipts for its first three years (or portion thereof during which the corporation was in existence) after 1993 and before the current year did not exceed $5 million; and
• The corporation's average annual gross receipts for all subsequent three-year periods (or portion thereof during which the corporation was in existence) did not exceed $7.5 million.

Once a corporation is recognized as a small corporation, it will continue to be exempt from AMT for as long as its average gross receipts for the prior three-year period do not exceed $7.5 million.  Once a corporation fails to qualify for this exemption, it cannot qualify in a later year.

A corporation may not qualify for the AMT exemption, or can lose its status as a small corporation, if it is aggregated with one or more entities under Internal Revenue Code (IRC) section 448(c)(2), or if the corporation has a predecessor entity under IRC section 448(c)(3)(D).  Once a corporation fails to qualify for the AMT exemption, it cannot qualify in a later year.

Practitioners may wish to review any Forms 1120 they have prepared to ensure the returns were filed correctly. An amended return needs to be filed to remove incorrectly claimed and paid AMT. On the top of Form 1120X, Amended U.S. Corporation Income Tax Return, please write "AMT-Exempt".  Mail amended returns to:

Internal Revenue Service
Mail Stop 6555
Ogden, UT 84201

Refer to the AMT page from the IRS Newsroom. For questions regarding the AMT exemption for small corporations, call the IRS at 866-899-9083, 7 a.m. to 3:30 p.m. Mountain Standard Time, Monday - Friday. See IRC section 55 (e) for complete information on the AMT exemption for small corporations.