Reducing regular tax is only part of the battle that a small business owner wages to increase after-tax returns. Minimizing or avoiding alternative minimum tax (AMT) where applicable is another important front that must be addressed. Some business owners may find themselves subject to AMT if they have certain substantial deductions and/or credits.
Alternative minimum tax is designed to ensure that all taxpayers pay at least some tax. Years ago, with tax shelters and other loopholes, wealthy individuals and corporations often paid little or no tax. In an effort to make all taxpayers share the tax burden, an AMT was imposed.
The AMT is a separate tax system, with its own deductions and tax rates. A taxpayer computes the regular income tax as well as a tentative AMT. The extent to which the tentative AMT exceeds regular tax liability is reported as AMT.
Alternative minimum tax liability for individuals can be reduced by certain personal tax credits, including a limited foreign tax credit (corporations can reduce their AMT liability ...