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65 IRET Congressional Advisory 1 (1997)

handle is hein.taxfoundation/iretcgadv0062 and id is 1 raw text is: aa October 1, 1997 No. 65 TWO CHEERS FOR CORPORATE AMT REFORM One of the few bright spots in the Taxpayer Relief Act of 1997 (TRA-97) is reform of the corporate alternative minimum tax (corporate AMT). The act's corporate AMT provisions, which were included largely because of the determination and insightfulness of House Ways And Means Committee Chairman Bill Archer (R-TX), achieve significant improvements in [Tihe deductii efficiency and simplicity. income tax, excessive, ten, The corporate AMT was By restricting enacted as part of the Tax corporate AM Reform Act of 1986. It improved, the constitutes an alternative corporate income tax. Icome Corporations compute their income tax liabilities using the rules of the regular corporate income tax and then using the rules of the corporate AMT and pay whichever of the two is larger. The corporate AMT has a lower rate than the regular corporate income tax (20% vs. 35%) but a broader base. TRA-97 makes two major changes in the corporate AMT. First, on new investments in depreciable property, AMT recovery periods will now be the same as regular-income-tax recovery periods. This is a very significant reform because the corporate AMT accomplished much of its base broadening by forcing companies to write off depreciable costs over longer time periods than the regular income tax permits. As three examples, for residential real estate the recovery period is 27.5 years under the regular income tax but was 40 years under the AMT; for transportation equipment serving air passengers, it was 7 years vs. 12 years; and for assets used in the production of wood products, it was 7 years vs. 10 years. Because of this change, the difference between corporations' regular and AMT incomes will decline sharply in future years, reducing the proportion of companies in the AMT. AMT depreciation will still be somewhat slower, however, on properties eligible under the regular income tax for the 200% declining balance depreciation method because the AMT substitutes the slower 150% declining balance method. Second, TRA-97 frees most corporations from the AMT's laborious and confusing computations: small companies, rns of the regulai far from being Sto be inadequate. themn furither, the r has wvorsened , not measurement of defined as having gross revenue under $5 million, are henceforth exempt from the corporate AMT. (And, once exempt, companies remain exempt until their gross revenue exceeds $7.5 million.) It is revealing that this provision has a low revenue cost (less than $600 million over 5 years). Previously, all corporations with more than a few thousand dollars of income were required to wade through the complexities of the AMT. Very few of those companies found at the end that they actually owed the tax, but all were forced to pay a stiff price in terms of the tax- compliance costs created by the corporate AMT's heavy paperwork demands. The rationale for the corporate AMT has been that without it some successful companies could take so many tax deductions that they could artificially reduce their taxable incomes to zero, or nearly so, and thereby avoid paying their fair share of tax. The corporate AMT supposedly Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to inorming the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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