The alternative minimum tax (AMT) is imposed on corporations in an amount by which the tentative minimum tax exceeds the regular income tax for the taxable year. The purpose of the AMT is to prevent taxpayers with substantial economic income from avoiding all tax liability through the use of exclusions, deductions and credits. Without the AMT, corporate taxpayers could significantly reduce their tax income through tax benefits under the regular tax structure, to the point of such reduction being unfair and unintended by Congress.

Comment.  The AMT comes in two flavors: the corporate AMT and the individual AMT. Only businesses subject to the corporate income tax are subject to the corporate AMT. The individual AMT captures all other business situations (for example, partnerships, S corporations, and sole proprietorships), since the profits, losses and deductions from them are "passed-through" to the owners to be reflected on their individual, personal income tax returns.

Gross receipts test

Qualifying small corporations are exempt from the AMT. A corporation's tentative minimum tax is zero if: the corporation's average annual gross receipts for its first three tax years and before the current tax year are $5 million or less; and the corporation's average annual gross receipts for all subsequent three-year periods are $7.5 million or less.

First taxable year

If the tax year is the first tax year that the corporation is in existence, the tentative minimum tax of the corporation for such year is zero. A corporation may not qualify for the AMT exemption if it loses its status as a small corporation due to aggregation with one or more corporations. Nor will a corporation qualify for exemption if it has a predecessor corporation.

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