United States General Accounting Office

GAO Report to the Honorable

William J. Coyne, House of

Representatives

April 1995 TAX POLICY

Experience With the

Corporate Alternative

Minimum Tax

GAO/GGD-95-88

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260125 

April 3, 1995

The Honorable William J. Coyne

House of Representatives

Dear Mr. Coyne:

This report responds to your request for information on the corporate

alternative minimum tax (AMT). In particular, the report discusses the

number, size, and industry class of corporations that paid AMT over the

period 1987 through 1992; why they were liable for it; whether AMT

achieved its purpose; and how AMT might affect corporate investment. AMT

was substantially revised by Congress in 1986 to ensure that no corporate

taxpayer with substantial economic income avoids significant tax liability

by using exclusions, deductions, and credits. In addition, Congress made

changes to AMT so that corporations that reported significant income on

their financial statements for a particular year would pay some tax in that

year. AMT raised almost $2.6 billion in net tax revenue in 1992.

Background The legislative history of AMT refers to three distinct measures of income:

economic income, financial statement or “book” income, and income as

defined for tax purposes. A calculation of economic income would include

all types of income, recognize all income when it is earned rather than

when it is received, subtract all the costs of earning the income, and make

adjustments for inflation. Because such a comprehensive measurement

would not be based solely on market transactions, it is not done in

practice. Financial statements include a comprehensive measure of

income based on historical records that can be verified. In contrast to

economic income, financial statement or book income does not adjust

values for inflation and does not recognize certain items of income until

they are received. The definition of income implicit in the tax code

combines a measure of taxpayers’ ability to pay taxes with the desire to

encourage certain activities through the tax code and to minimize the

difficulty of administering and complying with the tax law. Despite many

similarities, the three measures are substantially different from each other.

The purpose of AMT is to better coordinate the definition of income for tax

purposes with that of economic income and financial statement income.

Corporations are required to calculate their tax liability under two sets of

rules—computing their regular tax liability and their tentative AMT liability,

and paying whichever is greater. If the tentative AMT is more than the

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B-260125 

regular tax, the difference between them is AMT. AMT is described in

sections 55 through 59 of the Internal Revenue Code.

Corporations have to keep records to calculate AMT as well as the regular

tax. For tax year 1994, a corporation had to file Form 4626—used to figure

AMT—if its taxable income or loss before the net operating loss deduction,

plus its adjustments and preferences, totaled more than the lesser of

$40,000 or the corporation’s allowable exemption amount. The corporate

AMT was cited by all 17 corporations we interviewed in preparing for

testimony last year as among the provisions in the Internal Revenue Code

with the largest recordkeeping and compliance cost burden.1

The AMT rate is 20 percent, lower than the regular corporate tax rate of

35 percent now or 34 percent through 1992. However, AMT is levied on a

broader tax base than the regular tax because the AMT tax base includes

certain regular tax preferences and adjustments that either delay the time

when income is recognized or exclude income items altogether.

Two important AMT adjustments are related to depreciation and financial

statement income. Depreciation is the cost incurred by a business

reflecting the reduction in value of certain of its assets over time. For both

the regular tax and AMT, the amount of depreciation deductions taken in a

year is a certain fraction of the original purchase price of the assets.

Compared with the regular tax, deductions for depreciation under AMT are

smaller in the early years after an asset is placed in service and are spread

out over a longer time.

The book income and the adjusted current earnings (ACE) adjustments

were established to ensure that firms reporting large earnings on their

financial statements in a given year paid some tax in that year. Book

income reported on financial statements may not equal taxable income on

tax returns because some items of revenue and expenses are never

included in one or the other or are reported in different years. As a result,

book income may not be equal to the taxable income figure on tax returns,

as explained in appendix III. The book income adjustment was part of AMT

from 1987 through 1989. It was replaced by the ACE adjustment in 1990.

The ACE adjustment relies on income tax principles to define income in a

way that Congress intended to be as broad as the definition of book

income.

1

Tax System Burden: Tax Compliance Burden Faced by Business Taxpayers (GAO/T-GGD-95-42,

Dec. 9, 1994).

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AMT limits the amount of a corporation’s net operating losses from prior

years that can be deducted in calculating current year’s income to

90 percent of tentative taxable income computed under AMT rules. In

addition, it disallows the use of many credits available in the regular tax

and specifically restricts the amount of foreign tax credit that can be taken

for tax payments abroad.

AMT is also linked to the regular tax through the AMT credit. Corporations

that have paid AMT can credit these payments against their regular tax

liability in future years when they pay the regular tax. However, the credit

cannot be used to reduce regular tax liability below tentative AMT liability

in future years. With this crediting mechanism, AMT operates partially as a

prepayment of tax rather than as a permanent increase in tax liability.

(App. I provides a more complete discussion of the history and mechanics

of AMT.)

Results in Brief AMT more closely resembles a prepayment of tax than a permanent

increase in tax liability. As such, it has accelerated tax payments of

$27.4 billion over the 1987 through 1992 tax years. But AMT also provides

for credits for these prepayments in later years. Over the years 1987

through 1992, corporations used credits totaling $5.8 billion.2

 At the end of

1992, corporations had accumulated $21.6 billion in credits that will result

in lower tax revenues in the future as corporations apply their AMT credits

against their regular tax liabilities.

Most AMT revenues came from relatively few corporations, but many more

corporations bear some burden in complying with the AMT provisions. Of

the universe of 2.1 million corporations subject to AMT, just 2,000 large

corporations (or 0.1 percent) paid 85 percent of AMT payments in 1992, and

only 28,000 (or 1.3 percent) paid any AMT at all. This was the pattern every

year from 1987 through 1992. But few corporations that we studied in

detail paid AMT every year. Thus, over a longer period of time, a higher

percentage of corporations would pay some AMT. Even this percentage will

still be much lower than the percentage that have to file an AMT form or

keep AMT records. In 1992, 400,000 corporations filed the AMT form. And

even more would have had to produce one set of computations and

records for regular tax and another for AMT.

Not surprisingly, AMT has most affected corporations and industries that

use the exclusions, deductions, and credits that AMT was designed to

2

The inflation-adjusted numbers for AMT and AMT credits in 1992 dollars are in table II.1.

Page 3 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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offset. The two AMT provisions that produced the largest increases in

taxable income were the depreciation adjustment and the book and ACE

adjustments. In 1992, the depreciation adjustment increased taxable

income by about $23 billion and was an AMT item for 87 percent of all AMT

payers. The ACE adjustment increased income by about $19 billion and was

an AMT item for 67 percent of all AMT payers. AMT payments were also

affected by limitations on the amount of net operating losses and foreign

tax credits corporations may use.

The three industries that paid the most AMT were manufacturing,

transportation, and finance. Generally, their average tax rate increased 1

to 2 percentage points after accounting for AMT credits. The industry

whose tax rate was most affected was the mining industry, where the rate

increased by 4 to 6 percentage points after taking AMT credits into account.

Congress had two objectives in enacting AMT. AMT has partially achieved

the first objective of making corporations with positive economic income

pay tax. The AMT tax base comes closer to taxing economic income

because it does not allow certain tax preferences and exemptions that

cause the regular tax base to deviate from a tax on economic income. AMT

depreciation provisions appear to more closely approximate economic

depreciation when inflation is low, leading to a more accurate

measurement of economic income.3

 However, if inflation is high, AMT

depreciation provisions may lead to an overstatement of economic

income.

AMT has achieved its second objective by causing corporations that

reported positive amounts of book income in a particular year to pay some

tax in that year. In every year in the 1987 through 1992 period, at least

6,000 corporations with positive book income that paid no regular tax paid

some AMT; another 9,000 corporations with positive book income subject

to regular tax paid an additional AMT amount. While in all years in the same

period at least 290,000 corporations with positive book income did not pay

regular tax or AMT, the vast majority of these were small corporations and

had less than $40,000 in net income, which most likely qualified them for

the AMT exemption.

The effects of AMT on corporate investment are not clear. First, AMT

increases the average tax rate for businesses that pay AMT, decreasing their

cash flow. Some studies by economists have indicated that reductions in

3

The estimates of economic depreciation we used are the most commonly cited and comprehensive

estimates that we identified. However, since they are based on a 1981 study, they do not reflect

changes in depreciation rates since that time.

Page 4 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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cash flow can reduce investment by firms that must pay relatively high

costs for funds from external sources. These studies conclude that this

effect is more likely for smaller firms, firms that pay relatively small

amounts of dividends, firms that do not participate in the corporate bond

market, and firms that cannot use working capital to smooth investment

spending over time. However, none of the studies directly tested the

extent to which AMT actually affected investments.

Second, the literature indicates that the effects of AMT on marginal

incentives to invest depend on whether firms consistently pay AMT and on

the source of financing for investment.4

 For example, studies show that, if

corporations consistently pay AMT or receive AMT credits over long periods,

the lower AMT tax rate can more than offset the less generous AMT

depreciation allowance, thus enhancing the incentive to invest through

retained earnings or stock issuance. Conversely, if investment is financed

through debt, AMT can reduce the incentive to invest relative to the regular

tax.

For corporations that switch back and forth from regular tax to AMT tax

liabilities, research has shown that the effects on investment incentive are

more complicated. To illustrate, investment incentives are increased for

those firms that deduct investment costs while paying the higher regular

tax rate and that report investment income while paying the lower AMT

rate; the opposite situations produce effectively higher costs for

investments, thereby reducing investment incentives.

Our review of the available studies indicated that determining the effect of

AMT on investment is further complicated by the lack of consensus on how

significantly actual investments are affected by changes in investment

incentives. Some studies have concluded that investment is very

responsive to changes in tax incentives, while others have found small

effects.

Our ability to pursue the issues raised in the literature by testing the

effects of AMT on corporate investment decisions was limited in that we

analyzed only tax return data. However, that data showed that most of the

total revenue generated by AMT was paid by relatively large corporations

rather than small ones. We also note that, while AMT might reduce present

cash flows, future cash flows would be enhanced as taxpayers recover AMT

credits. Further, our analysis of the return data for the 5-year period from

4

The term marginal incentive refers to the additional tax that a business would pay if it invested an

additional dollar.

Page 5 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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1987 through 1991 showed that, of 10,000 corporations with assets of

$50 million or more, 13 percent either paid AMT or had unrecovered AMT

credits in all 5 years; 36 percent switched back and forth between AMT and

regular tax liabilities during the period; and the remaining 51 percent did

not pay AMT in any of the 5 years.

How Much AMT Was

Paid?

The amount of corporate AMT paid rose from $2.2 billion in 1987 to

$8.1 billion in 1990, before declining to $4.9 billion in 1992. These numbers

must be combined with the fact that recovery of AMT liability via the AMT

credit has been growing, albeit slowly, as shown in figure 1. Most

corporations that paid AMT in 1987 had not fully recovered their payment

by 1991, the last year we were able to examine, but the total dollar volume

of credits used rose from year to year.

Figure 1: AMT Liabilities and AMT

Credits Claimed Dollars in billions

0

2.0

4.0

6.0

8.0

1987 1988 1989 1990 1991 1992

Years

AMT

Credits

Source: GAO calculations based on Internal Revenue Service (IRS) Statistics of Income data.

Page 6 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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Which Corporations

Paid AMT?

The total number of corporations paying AMT was small. About 28,000, or

about 1.3 percent of the 2.1 million corporations subject to AMT in 1992,

paid AMT in 1992. The corresponding percentage ranged from 0.7 to

1.5 percent in the 1987 through 1992 period.

Although only about 28,000 firms paid AMT in 1992, many more

corporations were affected by it. For example, almost 400,000

corporations filed the AMT form with IRS in 1992 even though they owed no

AMT.

Of the approximately 2.1 million corporations that were subject to AMT in

1992, about 2,000 corporations with assets of $100 million or more paid 85

percent of the total corporate AMT liability. This was a pattern that

generally held true for 1987 through 1991 also. As shown in figure 2,

corporations with assets of $500 million or more paid 75 percent of all AMT

in 1992, irrespective of the credit they may have received.

Figure 2: Distribution of AMT Payers

and Liability by Asset Size, 1992

4%

2% 75%

18%

10%

9%

75%

5%

$500 million or more

$100 million - less than $500 million

$10 million - less than $100 million

$0 - less than $10 million

Payers Liability

Note: Numbers do not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

Page 7 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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However, most corporations that paid AMT from 1987 through 1992 were

relatively small. In most years, more than 70 percent of corporations

paying AMT had less than $10 million in assets. In 1992, 75 percent of AMT

payers had less than $10 million in assets, as is also shown in figure 2.

Nevertheless, relatively large corporations were more likely than smaller

corporations to pay AMT. For instance, in all years except one, about 20

percent of corporations with assets of $500 million or more paid AMT; in

contrast, no more than half of 1 percent of corporations with less than

$1 million in assets paid AMT.

The industries in which corporations paid the most AMT were

manufacturing, transportation, and finance. At the industry level, AMT

generally increased the amount of tax paid by about 1 or 2 percent of

taxable income. Eight specific industry subclasses that we

examined—auto, steel, chemicals, utilities, transportation, paper, oil and

gas extraction, and mining other than oil—had generally higher

percentages of AMT payers than existed in the nation as a whole during the

6 years we examined.

Firms differed from each other in how often they paid AMT and the extent

to which AMT increased their taxes. Of approximately 10,000 corporations

with over $50 million in assets that we tracked over a 5-year period, about

half paid AMT in at least one year. Of those that paid AMT at least once, most

paid it for only one year. Only about 160 of the 10,000 corporations we

studied paid AMT in all five years. In the larger universe of all AMT payers,

about a third of the AMT payers that also paid regular tax had their taxes at

least doubled by AMT.

Why Did Corporations

Pay AMT?

By far the most important elements that caused corporations to pay AMT

were the depreciation adjustment for property placed in service after 1986

and the book income and adjusted current earnings adjustments. For

instance, in 1992 the depreciation adjustment was included on about 87

percent of AMT returns and raised taxable income by about $23 billion. The

ACE adjustment was included on about 67 percent of AMT returns and

raised taxable income by about $19 billion. No other preference item or

adjustment was present in more than 10 percent of AMT returns.

AMT also caused corporations to pay tax by limiting their ability to take net

operating loss deductions and the foreign tax credit (FTC). About

32 percent of AMT payers in 1992 included net operating losses in their AMT

calculations, and about 19 percent reached the limitation on the use of the

Page 8 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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deduction. About 3 percent of AMT payers had FTC as part of their AMT

computation, and about one-fourth of FTC claimants were constrained by

the 90 percent FTC limit. FTC claims reduced overall AMT before credits by

32 percent.

Has AMT Achieved Its

Purposes?

AMT has partially achieved the congressional objectives of ensuring that

taxpayers with substantial economic income in a given year, and taxpayers

with positive book income in a given year, pay some tax in that year. By

including tax preferences in its tax base and by more closely

approximating economic depreciation when inflation is low, AMT leads to a

tax more closely based on economic income. In addition, in every year

from 1987 through 1992, at least 6,000 corporations with positive book

income that paid no regular tax paid some AMT, and at least 9,000

corporations with positive book income subject to regular tax paid an

additional AMT amount, as shown in appendix III.

AMT Leads to a Closer

Measurement of Economic

Income When Inflation Is

Low

A corporate tax based on economic income would deny many of the

preferences and exclusions now in the regular tax code, index the value of

assets and costs for inflation, and base depreciation deductions on

economic depreciation. AMT moves the tax code closer to taxing economic

income by including several preferences and exclusions in its tax base.

With respect to inflation, neither the regular tax nor AMT rules adjust the

measurement of income for inflation. Concerning depreciation, AMT

depreciation rules lead to deductions that more closely approximate

economic depreciation when inflation is low. However, AMT depreciation

deviates further from economic income than does regular tax depreciation

in the presence of moderate or high rates of inflation. AMT may also reduce

the generous deductions of nominal interest expense (rather than

inflation-adjusted interest expense) that corporations can claim at high

rates of inflation. (App. III provides additional information on

corporations’ book income, economic income, and AMT depreciation

rules.)

AMT Has Made More

Corporations With Positive

Book Income Pay Taxes

In 1992, AMT provisions were successful in making about 9,900

corporations with positive book income and no regular tax liability pay

some AMT, as shown in table 1. Also, about 13,800 corporations with

positive book income subject to regular tax paid an additional AMT amount.

About 4,300 corporations with negative book income also paid AMT—1,800

of these corporations paid both regular tax and AMT, and almost 2,500 of

Page 9 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
B-260125 

these corporations paid AMT but no regular tax. This payment of taxes by

corporations with losses may have been due to the fact that some

revenues were recognized for financial accounting purposes after they

were included on tax returns and/or expenses were recorded in

accounting records before they were deducted for tax purposes, as

explained in appendix III.

On the other hand, AMT did not reach all corporations with positive book

income. Of 2.1 million corporate returns subject to AMT in 1992, about

306,000 corporate returns reported positive book income but did not pay

regular or alternative minimum tax. The vast majority of these

corporations were small and had less than $40,000 in net income, so they

probably qualified for the AMT exemption. Of the larger corporations with

positive book income, most were investment companies, which generally

flow out all their income to shareholders. Because of this feature of their

business, these companies are exempt from the book income and ACE

adjustments.

Table 1: Book Income and Taxes of

Corporations Subject to AMT in 1992 Dollars in millions

Book income and tax status

Number of

returns

Total

regular tax

Total

AMT

Corporations with positive book income

No regular tax, no AMT 306,371 $0 $0

No regular tax, some AMT 9,855 $0 $1,770

Some regular tax, no AMT 660,632 $82,905 $0

Some regular tax, some AMT 13,843 $6,495 $2,172

Total 990,701 $89,400 $3,942

Corporations with negative book income

No regular tax, no AMT 983,603 $0 $0

No regular tax, some AMT 2,486 $0 $370

Some regular tax, no AMT 105,044 $5,539 $0

Some regular tax, some AMT 1,818 $1,023 $544

Total 1,092,951 $6,562 $914

Grand total 2,083,652 $95,962 $4,856

Note: Tax returns with AMT totaled 28,001.

Source: GAO calculations based on IRS Statistics of Income data.

Page 10 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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How Might AMT

Affect Corporate

Investment?

The effects of AMT on corporate investment are not clear. Studies and

comments by economists have examined two ways in which AMT might

affect investment: by (1) reducing cash flow and thus discouraging

investment, or (2) changing marginal incentives to invest, leading to

changes in investment.

Cash Flow Corporations finance investment through internal funds—retained

earnings or profits—or external funds such as debt or new stock issues.

For corporations that must use external sources and pay significantly

higher costs compared to their opportunity costs (earnings from investing

their own funds), investment could be sensitive to the current profitability

or cash-flow position of the firm.

A number of recent studies have found significant effects of cash flow on

investment, and some authors have concluded that some corporations find

external funds significantly more expensive than internal funds. These

studies have concluded that this is more likely to be the case for smaller

firms, firms that pay relatively small amounts of dividends, firms that do

not participate in the corporate bond market, and firms that cannot use

working capital to smooth investment spending over time.5

 Thus, for such

firms, AMT might reduce investment by reducing cash flow and forcing

them to finance investment with costly external funds.

It is not clear how many AMT payers meet these conditions. No study has

directly tested the extent to which such cash-flow constraints affect

corporations that paid AMT. The tax return data we used were limited in

their ability to directly test many of these factors. However, the data did

show that most AMT is paid by relatively large corporations. To the extent

that investment by large corporations is less dependent on current cash

flow than is the case for small corporations, the effect of the AMT on

investment would be limited. In addition, as AMT credits are reclaimed in

the future, cash flow would increase at that time, possibly increasing

investment.

5

Recent studies include R. Glenn Hubbard, Anil K. Kashyap, and Toni M. Whited, Internal Finance and

Firm Investment, National Bureau of Economic Research Working Paper 4392, June 1993; Toni M.

Whited, “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,” The

Journal of Finance, XLVII:4 (September 1992); Stephen D. Oliner and Glenn D. Rudebusch, “Sources of

the Financing Hierarchy for Business Investment,” The Review of Economics and Statistics, 1992;

Steven M. Fazzari and Bruce C. Petersen, “Working Capital and Fixed Investment: New Evidence on

Financing Constraints,” Rand Journal of Economics, 24:3 (Autumn 1993); and Steven D. Oliver and

Glenn D. Rudebusch, Is There a Broad Credit Channel for Monetary Policy?, Board of Governors of the

Federal Reserve System Working Paper 146, January 1994.

Page 11 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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Marginal Incentives to

Invest

Many studies have been done on the effects of corporate income taxes on

marginal incentives to invest, and several have directly investigated the

effects of the AMT on marginal incentives to invest. These studies have

investigated how the regular corporate income tax and AMT might affect

the incentive to invest through their tax rates, depreciation provisions, the

deductibility of interest payments and the nondeductibility of dividends,

loss provisions, and credits for certain types of investment. Relative to the

regular tax, AMT has a lower rate, a generally slower depreciation schedule,

and additional limitations on credits and losses. Because the lower tax

rate by itself would lower the cost of investment but the other two

features would raise the cost of investment, investment incentives may be

increased or decreased relative to the regular tax.

Several studies have investigated how AMT affects incentives to invest for

corporations that are consistently paying AMT or recovering AMT credits

over long periods. Studies we reviewed contained the following

conclusions:

• Incentives to invest were greater under AMT than under the regular tax for

firms permanently paying AMT that financed investments with equity. In

this case, the value of the lower tax rate more than offset slower

depreciation deductions, so the effective tax rate was lower.

• Investment incentives were reduced under AMT relative to the regular tax

for debt-financed investments. Because interest is deductible under both

AMT and the regular tax, a dollar of interest payments will reduce taxes by

a greater amount under the higher regular tax rate.6

• For investments financed with a mixture of debt and equity, investment

incentives under AMT can be higher or lower than the regular tax,

depending on the amount of debt used. For the mix of debt and equity

described as typical by two authors, investment incentives are greater

under AMT than under the regular tax.7

Another study addressed the more general situation where firms could

switch from the regular tax to AMT or pay AMT and then return to the

regular tax and recover all their AMT credits. In this circumstance, the

effect of AMT on investment incentives is more complicated. In this case,

the effect of taxes on the cost of capital investment will depend on the

6

Since the regular tax code favors debt-financed investment, because interest payments are deductible

while dividends are not, AMT may reduce this distortion.

7

See Jane G. Gravelle, The Economic Effects of Taxing Capital Income (Cambridge, MA: The MIT

Press, 1994), chapter 7; and B. Douglas Bernheim, “Incentive Effects of the Corporate Alternative

Minimum Tax,” in Lawrence H. Summers, ed., Tax Policy and the Economy, National Bureau of

Economic Research (Cambridge, MA: The MIT Press, 1989).

Page 12 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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timing of investment relative to when and how long the corporation pays

AMT, as well as on the source of financing for the investment. If

depreciation deductions are taken when the firm is paying the regular tax,

and income from the investment is received when the firm is paying AMT,

the cost of investment is relatively low. If depreciation deductions are

taken when the firm is paying AMT and income is taxed at the higher

regular tax rate, the cost of investment is higher.8

Our analysis showed that the circumstance envisioned in this later study

was the more common for AMT corporations—such firms were more likely

to switch between the regular tax and AMT. We tracked the 1987 through

1991 tax situations of 10,000 corporations with assets of $50 million or

more. Fifty-one percent did not pay AMT in any year. About 13 percent

either paid AMT or had unrecovered AMT credits in all 5 years. The

remaining 36 percent switched back and forth from the regular tax to AMT.

Our review of the available studies indicated that determining the effect of

AMT on investment is further complicated by the lack of consensus on how

significantly actual investments are affected by changes in investment

incentives. Analysts have widely differing views on how responsive

investment is to changes in tax rules. Some studies have concluded that

investment is very responsive to changes in tax incentives, while others

have found small effects. The difficulty stems from a lack of consensus on

the nontax determinants of investment; without a clear model of how

other factors affect investment, it is difficult to isolate the effects of taxes,

holding other factors fixed.

Objectives, Scope,

and Methodology

Our objectives for this report were to (1) determine which corporations

paid AMT and why they were liable for it, (2) examine whether AMT has

achieved its purpose, and (3) discuss how AMT might affect corporate

investment.

To meet our first objective, we analyzed the IRS Statistics of Income

corporate databases for 1987 through 1992, the most recent data available

at the time of our review. These data files of over 70,000 tax returns per

year include all corporations with assets of over $100 million and a

stratified probability sample of all other corporations organized for profit.

Results from firms with assets of less than $100 million are thus subject to

sampling errors. With the large sample sizes, the calculations of sampling

8

See Andrew Lyon, “Investment Incentives Under the Alternative Minimum Tax,” National Tax Journal,

XLIII:4 (1990), pp. 451-65.

Page 13 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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errors for 1989 and 1990 showed that the 95-percent confidence intervals

for statistics based on all AMT-paying firms were within 5 percentage points

of percentage estimates and within 5 percent of the value of other

estimates. Where larger confidence intervals were found, they are noted in

the report. We also constructed a database consisting of tax returns for

corporations that filed returns in each year from 1987 through 1991. This

database included about 10,000 corporations that had assets of over

$50 million in each of these years. Corporations in this database paid

73 percent of the total regular tax liability and 77 percent of all AMT paid in

1991. We tracked these corporations over time to assess their experience

with AMT. The major limitations of this database are that it does not

include (1) all corporations and (2) larger corporations that either went

out of business between 1987 and 1991 or merged with another

corporation and therefore did not file their own tax returns.

To address the second objective, we reviewed AMT’s legislative history.

Using the previously described tax return data, we also analyzed the

relationship between the income or losses corporations showed on their

books and the regular tax and/or AMT they paid. To assess whether AMT

effectively taxes corporate economic income, we compared the AMT tax

base with the tax base proposed by the Treasury Department in 1984.

Treasury’s proposal was to change the tax system so that real economic

income would be taxed. We also compared the AMT tax base with the list of

tax expenditures published by the Joint Committee on Taxation to

determine the extent to which AMT includes items that are preferences or

exclusions in the regular tax. To determine whether the AMT depreciation

provisions are consistent with economic depreciation, we obtained

estimates of the present value of economic depreciation deductions under

the regular tax and AMT from the Congressional Research Service. These

estimates, while comprehensive and widely used by researchers, were

based on work on economic depreciation published in 1981. Therefore, the

estimates are subject to error and would not reflect any changes in

economic depreciation rates that might have occurred since 1981.

To meet the third objective, we reviewed various academic studies and

articles. In addition, we reviewed the literature on the determinants of

business investment.

We did not obtain IRS comments on this report because we did not address

tax administration issues.

Page 14 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
B-260125 

We did our work in Washington, D.C., between May 1993 and

February 1995 in accordance with generally accepted government auditing

standards. Appendixes II through IV provide more detail on our findings as

they relate to our objectives.

We are sending copies of this report to various congressional committees

and Members of Congress, the Secretary of the Treasury, and other

interested parties. Copies will be made available to others upon request.

The major contributors to this report are listed in appendix V. If you have

any questions, please contact me on (202) 512-5407.

Sincerely yours,

Jennie S. Stathis

Director, Tax Policy and

 Administration Issues

Page 15 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Contents

Letter 1

Appendix I 

AMT’s Purpose:

Taxpayers With

Substantial Income

Should Pay Some Tax

20

Legislative History of AMT 20

Overview: How the Corporate AMT Works 22

AMT Preferences and Adjustments 24

AMT Limits on Net Operating Loss Deductions and Tax Credits 29

Appendix II 

Which Corporations

Paid AMT and Why?

33

AMT Accounts for Significant Revenues From Corporations 33

While Few Corporations Have Paid AMT, Large Firms Are More

Likely to Pay AMT

34

AMT Liability by Industry 37

AMT Significantly Increased Tax Liability for Some Taxpayers 41

About Half of Large Corporations Paid AMT at Some Time 42

The Book/ACE Adjustment and Depreciation Were the Most

Significant AMT Components

45

AMT Limits Tax Credits and Deductions for Prior Losses 48

Appendix III 

Has AMT Achieved Its

Goals?

52

Is AMT Designed to Tax Economic Income? 52

Has AMT Ensured That Corporations With Positive Book Income

in a Given Year Paid Some Tax in That Year?

61

Appendix IV 

Has AMT Affected

Corporate

Investment?

69

Effects of AMT on Cash Flow and Investment 69

Taxes Affect Investment Incentives 70

Appendix V 

Major Contributors to

This Report

75

Tables Table 1: Book Income and Taxes of Corporations Subject to AMT

in 1992

10

Table I.1: Calculation of AMTI 22

Page 16 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Contents

Table I.2: Calculation of Net AMT 23

Table I.3: AMT Preference Items—Regular Tax and AMT

Treatment

25

Table I.4: AMT Adjustments—Regular Tax and AMT Treatment 26

Table I.5: ACE Adjustment Calculation 28

Table I.6: Net Operating Loss and Tax Credit Rules Under the

Regular Tax and AMT

31

Table II.1: Size of Regular Tax Revenues, AMT Revenues, and

AMT Credits

33

Table II.2: Percentage of All Corporations Paying AMT 34

Table II.3: Percentage of AMT Payers by Size of Corporation 35

Table II.4: Percentage of Corporate Returns With AMT by Size of

Corporation

36

Table II.5: Percentage of Total Assets in Corporations by AMT

Status

36

Table II.6: Percentage of AMT Liability by Size of Corporation 37

Table II.7: Percentage of Corporations Paying AMT by Industry 38

Table II.8: AMT Liability by Industry 39

Table II.9: Average Tax Rates Without and With AMT by Industry 40

Table II.10: Percentage of Corporations Paying AMT in Eight

Industry Subclasses

40

Table II.11: AMT Liability for Eight Industry Subclasses 41

Table II.12: Average Tax Rates Without and With AMT by

Industry Subclass

41

Table II.13: Percentage of AMT Payers by Percentage Increase in

Tax Due to AMT

42

Table II.14: Percentage of $50+ Million Corporations Paying AMT

by the Number of Years Paying AMT and Percentage of Corporate

Assets in Those Corporations

43

Table II.15: Percentage of AMT Payers With Consecutive Years

Paying AMT by Number of Years Paying AMT

43

Table II.16: Percentage of AMT Payers That Recovered AMT

Liability, by Tax Year of AMT Liability

44

Table II.17: Percentage of AMT Payment Recovered by All AMT

Credit Claimants, by Year of AMT Liability

44

Table II.18: Percentage of Firms in GAO Database Either Paying

AMT or Having Unused AMT Credits and Percentage of Assets in

Those Firms

45

Page 17 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Contents

Table II.19: Percentage of $50+ Million Corporations Either

Paying AMT or Having Excess AMT Credits by the Number of

Years in This Position and Percentage of Corporate Assets in

Those Corporations

45

Table II.20: AMT Preferences and Adjustments 47

Table II.21: Percentage of AMT Payers With Adjustments and

Preferences

48

Table II.22: Percentage of AMT Payers With Deduction for AMT

NOL

49

Table II.23: Percentage of AMT Payers With AMT NOL

Deductions by Size of AMT NOL Deduction Relative to AMTI

Before Losses

49

Table II.24: Percentage of AMT Payers Claiming AMT FTC and

Resulting Reduction in Aggregate AMT

50

Table II.25: Percentage of AMT Payers With AMT FTC by Size of

AMT FTC Relative to AMT Before Credits

50

Table II.26: Percentage of AMT Payers With AMT NOL and FTC

by Size of AMT NOL and FTC Relative to AMTI

51

Table III.1: Present Value of Depreciation Under Regular Tax,

AMT, and Economic Depreciation

55

Table III.2: Percentage Difference in Present Value of Regular

Tax and AMT Depreciation From Economic Depreciation

57

Table III.3: AMT Tax Base and Corporate Tax Expenditures 59

Table III.4: Percentage of Corporations in Net Income and Book

Income Categories

62

Table III.5: Percentage of Corporations in Regular Taxable

Income and Book Income Classes

63

Table III.6: Percentage of Corporations With Regular Tax

Payment, by Book Income Status

63

Table III.7: Number of Corporations Paying Some and No Regular

Tax and AMT, by Book Income Status, by Year

64

Table III.8: Percentage of Corporations Paying AMT by Regular

Tax Status

64

Table III.9: Percentage of AMT Payers by Regular Tax Status and

Net Income Status

65

Table III.10: Percentage of AMT Liability by Regular Tax Status

and Net Income Status

65

Table III.11: Percentage of AMT-Paying Corporations by Book

Income Status

66

Table III.12: Percentage of Taxpayers With Positive Book Income

by Tax Status

66

Page 18 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Contents

Table III.13: Percentage of AMT Liability by Regular Tax and

Book Income Status

67

Table III.14: Characteristics of Corporations With Positive Book

Income Paying No Regular Tax or AMT

68

Table IV.1: Major Tax Code Features Affecting Investment in

Regular Tax and AMT

71

Figures Figure 1: AMT Liabilities and AMT Credits Claimed 6

Figure 2: Distribution of AMT Payers and Liability by Asset Size,

1992

7

Abbreviations

ACE adjusted current earnings

AMT alternative minimum tax

AMTI alternative minimum taxable income

FTC foreign tax credit

IRS Internal Revenue Service

JCT Joint Committee on Taxation

NOL net operating loss

OBRA Omnibus Budget Reconciliation Act

TAMT tentative alternative minimum tax

TRA Tax Reform Act of 1986

Page 19 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

In addition to the regular income tax, both corporations and individuals

are subject to an alternative minimum tax (AMT). The tax system has

historically tried to achieve two potentially conflicting goals. One goal has

been to raise revenue in relation to taxpayers’ ability to pay, which is

generally measured by annual income.1

 Another has been to encourage

certain types of economic activity thought to be beneficial to society. This

goal has been pursued through provisions (tax preferences) that exclude

various types of income from tax, delay the payment of tax on certain

types of income, or grant tax credits for certain activities.

These two goals can conflict with each other. At various times, reports

that individuals and corporations were able to pay no tax through the

direct use of tax preferences and through interactions of preferences and

other features of the tax code led to concerns that the ability-to-pay goal

was not being met. These concerns led Congress to set limits on

preferences in the regular tax code and to create AMT.

Legislative History of

AMT

The idea of AMT was originally developed by the Treasury Department in

1969. Treasury studies found that some high income individuals paid little

or no tax, and that many high income individuals paid tax at a lower rate

than individuals with lower income. In response to these findings,

Treasury proposed establishing a minimum tax for individuals.

The Tax Reform Act of 1969 included an add-on minimum tax for both

noncorporate and corporate taxpayers on certain tax preferences. A

10-percent tax was levied on the corporate minimum tax base, which was

the sum of corporate tax preferences2

 minus a $30,000 exemption amount

and a corporation’s regular tax liability. Levied in addition to the

taxpayer’s regular tax liability, this was an add-on rather than an

alternative tax. The Tax Reform Act of 1976 added preferences and

changed the exemption amount.

In 1978, concerns about the effectiveness of the individual AMT led to

changes. In contrast to an add-on minimum tax, the tax introduced in 1978

1

Certain provisions of the tax code are consistent with lifetime income or consumption being the

preferred measure of a taxpayer’s ability to pay, and debate continues over which is the most

appropriate measure of ability to pay.

2

The tax preferences included in the corporate add-on tax base were excess accelerated depreciation

on real property; amortization of certain rehabilitation expenditures, certified pollution control

facilities, and railroad rolling stock; excess bad debt reserves for financial institutions; excess

depletion; certain capital gains; and the excess of the fair market value over the option price of certain

stock options.

Page 20 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

developed the AMT concept of levying a tax on an alternative income base

when the liability under the alternative base is greater than the regular tax

liability. From 1978 to 1982, individuals were subject to both AMT and the

add-on minimum tax. In 1982, the add-on tax for individuals was repealed

and the AMT base broadened. Throughout this period, the corporate add-on

tax was essentially unchanged.

In its 1984 tax reform proposal, the Treasury Department proposed

changing business taxes, including the corporate income tax, so that the

tax base more closely approximated the real economic income of

businesses.3

 In addition to several important structural changes, Treasury

recommended eliminating over 45 existing tax preferences and limiting

many others. In particular, Treasury proposed eliminating most of the

preferences in the regular tax that were included in the add-on tax.

Treasury concluded that a minimum tax or an add-on tax would not be

necessary if the preferences in the tax code were eliminated directly.

In contrast to the Treasury Department proposal, the administration’s 1985

tax reform proposal recommended that the corporate add-on minimum tax

be replaced with an AMT.

4

 Also in contrast to the Treasury proposal, the

President’s proposal included additional preferences in the regular tax, did

not repeal others, and did not index the corporate tax base for inflation.

The proposal called for an AMT under which taxpayers would calculate

their income under two systems and pay AMT when it reflected greater tax

liability. The President’s proposal also called for an expanded list of

preferences to be covered by AMT.

The changes actually made to the corporate AMT were substantial and were

included in the Tax Reform Act of 1986 (TRA). The former add-on tax was

repealed and replaced with an AMT similar to the minimum tax that had

applied to individuals before 1986. Using language that mirrored both

House and Senate reports, the Joint Committee on Taxation (JCT) staff’s

explanation of the act discussed the rationale for the changes in AMT:

“Congress concluded that the minimum tax should serve one overriding objective: to

ensure that no taxpayer with substantial economic income can avoid significant tax

liability by using exclusions, deductions, and credits. Although these provisions may

3

Tax Reform for Fairness, Simplicity, and Economic Growth (Washington, D.C.: U.S. Department of

the Treasury, November 1984).

4

The President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity (Washington,

D.C.: May 1985).

Page 21 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

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provide incentives for worthy goals, they become counterproductive when taxpayers are

allowed to use them to avoid virtually all tax liability....

“In particular, Congress concluded that both the perception and the reality of fairness have

been harmed by instances in which corporations paid little or no tax in years when they

reported substantial earnings, and may even have paid substantial dividends, to

shareholders. Even to the extent that these instances may reflect deferral, rather than

permanent avoidance, of corporate tax liability, Congress concluded that they

demonstrated a need for change.”5

Since the passage of TRA, several other important changes have been made

to the corporate AMT. However, the overall structure of AMT has remained

essentially the same. AMT is governed by sections 55 to 59 of the Internal

Revenue Code.

Overview: How the

Corporate AMT Works

Under current law, corporations are to calculate tax liability under two

separate systems—the regular tax and AMT. To comply with the AMT

provisions, taxpayers go through the following process:

• First, they calculate Alternative Minimum Taxable Income (AMTI). To do

this, taxpayers start with their taxable income, add the value of a number

of preference items and adjustments, and then deduct any available AMT

net operating losses. Table I.1 shows this calculation.

Table I.1: Calculation of AMTI

Operation Item

Taxable income before net operating loss (NOL)

deduction

Plus AMT preferences

Plus or minus AMT adjustments

Equals Tentative AMTI

Minus AMT NOL deduction (limited to 90 percent of 

tentative AMTI)

Equals AMTI

Sources: GAO; Stewart S. Karlinsky, Alternative Minimum Tax (New York: Research Institute of

America, 1993).

• Next, taxpayers calculate Tentative Alternative Minimum Tax (TAMT). To

do this, they reduce AMTI by an exemption amount and multiply the

5

Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986

(Washington, D.C.: U.S. Government Printing Office, 1987), pp. 432-33.

Page 22 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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AMT’s Purpose: Taxpayers With Substantial

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remainder by the AMT tax rate, which is 20 percent. They then subtract any

allowable credits, primarily the AMT foreign tax credit.

• Finally, taxpayers compare TAMT liability with regular tax liability. If TAMT

is more than the regular tax, the taxpayer is subject to AMT. The taxpayer

will pay the government the amount of TAMT liability. The difference

between TAMT and the regular tax is the amount of AMT actually owed. If

regular tax is more than TAMT, the taxpayer is subject to the regular tax.

The calculation of regular tax owed can include a credit for AMT paid in

earlier years. Because of the AMT credit, any AMT paid may be recouped in

future years when the taxpayer returns to the regular tax. In this regard,

AMT more closely resembles a prepayment of tax than a permanent

increase in tax liability. However, taxpayers cannot reduce their regular

tax liability below TAMT through the use of the AMT credit. Table I.2 shows

this calculation.

Table I.2: Calculation of Net AMT

Operation AMT item Comments

AMTI

Minus AMT exemption

amount

Generally $40,000; phased out for

corporate taxpayers with AMTI above

$150,000.

Multiply by AMT rate

(20 percent)

Equals AMT before

allowable credits

Minus AMT foreign tax

credit

Limit rules require worldwide AMTI to be

calculated; AMT foreign tax credit (in

conjunction with allowable investment

credits) cannot reduce AMT liability by

more than 90 percent; the credit can be

carried back 2 years or forward 5 years.

Minus AMT investment tax

credit carryforwards

Credits cannot reduce AMT by more than

25 percent.

Equals Tentative AMT

(TAMT)

Compare TAMT with regular

tax liability

If tentative AMT > regular tax, tentative

AMT is owed; net AMT is the amount by

which TAMT exceeds regular tax liability;

net AMT can be carried forward and

credited against regular tax in future years.

Sources: GAO; West’s Federal Taxation: Corporations, Partnerships, Estates, and Trusts (St. Paul,

MN: West Publishing Company, 1990).

Page 23 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

An example will illustrate how AMT works. If a corporation computed its

regular tax as $1 million and its tentative AMT as $1.5 million, it would pay

$1.5 million. One million dollars of this payment would be classified as

regular tax, and $0.5 million would be classified as AMT.

If the same corporation found that in the next year it owed $2 million as its

regular tax liability and $1 million of TAMT, the corporation would then be

subject to just the regular tax. The corporation could claim a credit against

its regular tax for the $0.5 million in AMT it paid the year before and then

send $1.5 million to the government. In this case, it would recoup its AMT

payment quickly. However, the AMT credit cannot reduce current year

regular tax liability below current year AMT liability. If the corporation’s

TAMT in the second year had been $1.75 million instead of $1 million, it

could only have claimed a credit of $0.25 million and would have had to

carry the remaining $0.25 million in uncredited AMT payments ahead to

future years.

AMT Preferences and

Adjustments

In general, AMT preferences and adjustments reflect aspects of the regular

tax that either (1) defer tax by rapidly recognizing expenses or by delaying

revenue recognition, or (2) always exclude certain income from the

definition of taxable income.

AMT Preferences AMT preferences under the post-TRA AMT generally maintain the preferences

that were in place under the add-on minimum tax. Table I.3 lists the AMT

preference items and describes how their regular tax treatment differs

from their AMT treatment.

Page 24 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

Table I.3: AMT Preference

Items—Regular Tax and AMT

Treatment

AMT preference Regular tax treatment AMT treatment

Real estate depreciation

(pre-1987 property)

Depreciated over 15, 18, or

19 years using 175-percent

declining-balance method

Depreciated over 15, 18, or

19 years using straight-line

method

Certified pollution control

facilities amortization

(pre-1987 property)

Taxpayers can elect 5-year

amortization

The excess of the

amortization deduction over

the amount that would have

been allowed as

depreciation under section

167 or 168

Appreciated capital gain

property contributed to

charity (repealed in the

Omnibus Budget

Reconciliation Act (OBRA) of

1993)

Market value of contributed

property may be deducted,

subject to a cap of 10

percent of income

Capital gain on the property

is included in AMTI

Percentage depletion Certain percentage of

income can be deducted

for depletion, regardless of

the amount of the investment

Excess of the depletion

deduction over the

property’s adjusted basis is

added to AMTI

Intangible drilling costs Seventy percent of drilling

costs for domestic oil, gas,

and geothermal wells can

be deducted immediately

“Excess” intangible drilling

costs are the amount that

regular tax deductions

exceed deductions over

10-year amortization. The

amount of excess drilling

costs over 65 percent of

income is included in AMTI

Financial institution reserve

for bad debts

Thrifts and certain banks

may elect to deduct a

percentage of income as an

addition to their bad debt

reserve

Amount by which regular

tax deduction exceeds

deduction based on actual

experience of bad debts

included in AMTI

Certain tax-exempt income Interest from certain private

activity bonds is exempt

Interest from small issue,

mortgage revenue, student

loan, and redevelopment

bonds is included in AMTI

AMT Adjustments AMT adjustments differ from AMT preferences in that adjustments can be

positive or negative. Thus, adjustments related to the deferral of tax will

generally be positive in the early years of an asset’s useful life, increasing

AMTI, and negative in the later years, decreasing AMTI. Table I.4 describes

their regular and AMT tax treatments.

Page 25 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

Table I.4: AMT Adjustments—Regular

Tax and AMT Treatment AMT adjustment Regular tax treatment AMT treatment

Real estate depreciation

(post-1986 structures)

Depreciated using

straight-line method over

27.5- or 31.5-year useful

life; post-OBRA 1993,

nonresidential real property

is depreciated over 39 years

Depreciated using

straight-line method over

40-year useful life

Personal property

depreciation (post-1986

equipment)

Depreciated using 200-

percent declining-balance

method over asset’s

recovery period

Depreciated using 150-

percent declining-balance

method over asset’s

(generally longer) adjusted

depreciation schedule life

Long-term contracts Limited use of

completed-contract method

of accounting is allowed

(income is not recognized

until contract is completed)

Percentage-completed

method of accounting must

be used (except for home

construction contracts)

Installment sales Pre-OBRA 1987, installment

method of accounting

available for some

businesses

Businesses must recognize

gain or loss at the time of

sale of assets

Amortization of pollution

control facilities (post-1986)

Eighty percent of

amortizable basis can be

amortized over 5 years

Must be amortized over

asset’s class life using

straight-line method

Mining exploration and

development costs

Certain costs can be

expensed (deducted

immediately)

Costs must be capitalized

and amortized over 10 years

Source: GAO.

Book Income and ACE

Adjustments

One of the most important components of the corporate AMT has been the

book income adjustment and its successor, the adjusted current earnings

(ACE) adjustment. During the debate over TRA, the Senate added an

adjustment to AMT based on a corporation’s reported financial statement

income. The final bill included an adjustment based on book income for

tax years 1987 through 1989, and specified that, after 1989, the book

profits adjustment would be replaced by the ACE adjustment. The ACE

adjustment is patterned after the calculations required in the tax code for

calculating earnings and profits. The JCT also described the reasons for

book income and ACE adjustments:

“With respect to corporations, Congress concluded that the goal of applying the minimum

tax to all companies with substantial economic incomes cannot be accomplished solely by

compiling a list of specific items to be treated as preferences. In order to achieve both real

Page 26 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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AMT’s Purpose: Taxpayers With Substantial

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and apparent fairness, Congress concluded that there must be a reasonable certainty that,

whenever a company publicly reports significant earnings, that company will pay some tax

for the year.

“For the years from 1987 through 1989, Congress concluded that this goal should be

accomplished by means of a preference based upon financial statement or book income

reported by the taxpayer pursuant to public reporting requirements or in disclosures made

for nontax reasons to regulators, shareholders, or creditors. Congress concluded that it

was particularly appropriate to base minimum tax liability in part upon book income during

the first three years after enactment of the Act, in order to ensure that the Act will succeed

in restoring public confidence in the fairness of the tax system.

“For taxable years beginning after 1989, Congress concluded that the book income

preference should be replaced by the use of a broad-based system that is specifically

defined by the Internal Revenue Code. Congress intended that this system should generally

be at least as broad as book income, as measured for financial reporting purposes, and

should rely on income tax principles in order to facilitate its integration into the general

minimum tax system.”6

Book Income Adjustment The book income adjustment was in effect from 1987 through 1989. Under

its rules, if a corporation’s adjusted net book income exceeded AMTI,

50 percent of the difference was added to AMTI. Although the book income

adjustment was described as an adjustment, it was similar to a preference

because it could not be negative. If net book income was less than AMTI, no

adjustment was made. Because the AMT tax rate was 20 percent, effectively

book income (if greater than AMTI) was taxed at a rate of 10 percent

(20 percent of 50 percent).

TRA specified the financial statements to be used to calculate the book

income adjustment. For example, if a corporation had filed a financial

statement with the Securities and Exchange Commission, this statement

was to be used in the calculation. If the corporation was not required to

file this statement, other audited financial statements prepared for nontax

purposes could be used.

ACE Adjustment The ACE adjustment replaced the book income adjustment in 1990. The ACE

adjustment is a modified version of the calculation of earnings and profits.

Conceptually, earnings and profits are a measure of the economic

resources available to corporations to pay dividends without drawing

6

General Explanation of the Tax Reform Act of 1986 (Washington, D.C.: U.S. Government Printing

Office, 1987), pp. 434-35.

Page 27 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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AMT’s Purpose: Taxpayers With Substantial

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down their capital. While not specifically defined in the tax code, the

earnings and profit concept is developed in several code sections and

regulations.

Many of the adjustments required to calculate ACE involve items that are

also AMT adjustments and preferences. Once ACE is calculated, it is

compared to AMTI, and 75 percent of the difference between the two is

added to AMTI. Unlike the book income adjustment, ACE can be a negative

amount (to the extent to which positive ACE adjustments were made in

prior years) and can therefore reduce AMT liability. Table I.5 summarizes

the ACE calculation.

Table I.5: ACE Adjustment Calculation

Operation Preadjustment AMTI Comments

Plus or minus ACE depreciation adjustment Straight-line depreciation

used; this adjustment was

repealed in OBRA 1993 for

personal property placed in

service after 1993

Plus Items included in earnings and

profits

(1) Tax-exempt interest; (2)

certain distributions from life

insurance contracts; (3) inside

buildup on life insurance

contracts

Plus Disallowance of items not

deductible in computing

earnings and profits

(1) Certain dividends received;

(2) certain dividends paid; (3)

other

Plus or minus Other adjustments based on

earnings and profit rules

(1) Intangible drilling costs; (2)

circulation expenses; (3)

organization expenses; (4)

last-in-first-out inventory

adjustments; (5) installment

sales

Plus or minus Other items (1) Disallowance of loss on

exchange of debt pools; (2)

certain acquisition expenses;

(3) depletion; (4) basis

adjustment in determining loss

or gain from sale or exchange

of property

Equals ACE

Source: ACE worksheet, IRS Form 4626 instructions.

Page 28 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

AMT Limits on Net

Operating Loss

Deductions and Tax

Credits

AMT places limits on the availability of credits and deductions in order to

prevent taxpayers from eliminating all tax liability in a given year. As the

JCT reported:

“In addition, Congress concluded that a change was necessary with regard to the use of net

operating losses, foreign tax credits and investment tax credits to avoid all U.S. tax liability.

Absent a special rule, a U.S. taxpayer with substantial economic income for a taxable year

potentially could avoid all U.S. tax liability for such year so long as it had sufficient such

credits and losses available. While Congress viewed allowance of the foreign tax credit and

net operating loss deduction, along with the transitional relief relating to the investment

tax credit, as generally appropriate for minimum tax purposes, it was considered fair to

mandate at least a nominal tax contribution from all U.S. taxpayers with substantial

economic income.”7

Net Operating Loss

Deduction

Losses are generally recognized when they occur for financial accounting

purposes, and corporations can report negative amounts of income on

their tax returns. However, under current law, a corporation that loses

money in a given year does not get a tax refund for that tax year. This

means that expenses that would reduce taxable income and reduce taxes

had the firm made money do not reduce taxes if the firm loses money.

Without a carryforward or carryback provision, corporations that made

profits in each year would pay less tax over time than corporations that

earned the same profits over time but had some years with profits and

some years with losses. Under current law, corporations can carry losses

forward to 15 future years and deduct them when they have positive

income. Corporations can also carry losses back 3 years.

Although deductions for net operating losses are allowed in the

calculation of AMTI, the deduction cannot exceed 90 percent of AMTI. With

an AMT tax rate of 20 percent, this guarantees that (aside from the

exemption amount and other credits) corporations subject to AMT will pay

tax equal to at least 2 percent of AMTI (20 percent times at least 10 percent

of AMTI).

Foreign Tax Credit (FTC) In general, U.S. corporations are subject to U.S. income tax on their

worldwide income. However, corporations that operate abroad may also

be subject to foreign income taxes. Like most countries, the United States

allows taxpayers a tax credit for foreign income taxes paid so that

7

General Explanation of the Tax Reform Act of 1986 (Washington, D.C.: U.S. Government Printing

Office, 1987), p. 436.

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Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

corporations that operate internationally are not taxed twice on the same

income. At the same time, the amount of foreign tax that can be credited is

limited so that FTCs do not offset U.S.-source income.

Under AMT, taxpayers must recalculate their foreign-source income and the

FTC limitations according to AMT rules. AMT also places an additional limit

on FTC. The AMT FTC cannot reduce AMT (determined without regard to the

AMT net operating loss deduction) by more than 90 percent. If the AMT FTC

exceeds 90 percent, the excess amount can be carried back 2 years or

forward 5 years, as can the regular tax FTC.

Other Tax Credits Historically, taxpayers who have undertaken a variety of activities have

qualified for credits. Before TRA, corporations could earn investment tax

credits for investing in qualified capital assets. Currently, corporations can

earn tax credits for qualified research and development spending, income

earned in U.S. possessions, spending on rehabilitation of qualified

structures, wages on qualified jobs, and other tax-related activity. The

purpose of these credits is to encourage certain types of activity that is

thought to lead to social benefits. The regular tax places limits on the

extent that corporations can use credits to reduce their tax liability.

Under AMT, these credits generally cannot be used to reduce AMT liability.8

Additionally, many tax credits cannot be used for the regular tax if they

reduce regular tax liability below AMT liability. An exception to this rule

exists for the possessions credit; it cannot reduce AMT, but it is included in

the calculation of regular tax.

Table I.6 compares the tax rules for the deduction of net operating losses

with those for tax credits under the regular tax and AMT.

8

Investment tax credits earned before the passage of TRA could be used to reduce AMT; the use of

these credits was phased out over time.

Page 30 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

Table I.6: Net Operating Loss and Tax

Credit Rules Under the Regular Tax

and AMT

Provision Regular tax treatment AMT treatment

Net operating loss deduction Can be carried back 3

years or forward 15 years;

can be used to eliminate all

current year tax liability.

Alternative tax net operating

loss can reduce AMTI by at

most 90 percent; unused

alternative losses can

similarly be carried forward

or back.

Foreign tax credit Can be carried back 2

years and forward 5 years;

can eliminate all U.S. tax on

foreign-source income.

Calculated on AMTI base;

limited to 90 percent of AMT.

General business credit

includes (1) investment

credit, (2) jobs credit, (3)

alcohol fuels credit, (4)

research credit, and (5)

low-income housing credit

Can be carried back 3

years and forward 15 years;

cannot exceed difference

between regular tax and

tentative AMT, or 25

percent of regular tax

liability in excess of $25,000.

Generally cannot be used

to reduce AMT; before

1991, corporations could

use the investment credit to

reduce AMT by up to 25

percent.

Possessions tax credit Credit for U.S. tax on

income earned in active

business in U.S. possession.

Possessions income not

included in AMTI; credit

cannot reduce AMT.

Nonconventional fuel credit Cannot exceed difference

between regular tax and

tentative AMT; no

carryforwards or carrybacks.

Cannot be used to reduce

AMT.

Orphan drug credit Cannot exceed difference

between regular tax and

tentative AMT; no

carryforwards or carrybacks.

Cannot be used to reduce

AMT.

Source: GAO; West’s Federal Taxation.

AMT Credit AMT and the regular tax are coordinated through the AMT credit mechanism.

The JCT explained the reasons for the AMT credit:

“Finally, Congress concluded that it was desirable to change the underlying structure of the

minimum tax in certain respects. In particular, to the extent that tax preferences reflect

deferral, rather than permanent avoidance, of tax liability, some adjustment was

considered necessary with respect to years after the taxpayer has been required to treat an

item as a minimum tax preference, and potentially to incur minimum tax liability with

respect to the item. Absent such an adjustment, taxpayers could lose altogether the benefit

of certain deductions that reflect costs of earning income.”9

9

General Explanation of the Tax Reform Act of 1986 (Washington, D.C.: U.S. Government Printing

Office, 1987), p. 436.

Page 31 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix I 

AMT’s Purpose: Taxpayers With Substantial

Income Should Pay Some Tax

The rationale behind the AMT credit can be illustrated for the case of

depreciation. As shown in table I.3, the depreciation rates for AMT

purposes are slower and useful lives are longer than under the regular tax.

This means that depreciation deductions early in an asset’s useful life are

smaller than under the regular tax. Later in the asset’s useful life,

depreciation deductions will be greater under the AMT schedule than under

the regular tax. If a taxpayer is under AMT when an asset is purchased and

later returns to the regular tax, the total amount of depreciation

deductions the taxpayer claimed for the asset could be significantly less

than the original cost. In this case, the taxpayer’s larger regular tax

depreciation deductions are effectively disallowed by AMT in favor of

smaller deductions. The AMT credit allows the taxpayer to eventually

deduct the cost of the asset, either through depreciation deductions

directly or through AMT credits that restore the previously disallowed

depreciation deductions.

Before 1989, the AMT credit carryforward was limited to those items

involving deferral of tax only. In OBRA 1989, this rule was changed so that

all items that generate AMT, whether timing or permanent differences, lead

to a creditable carryforward for tax years after 1989. Unlike the net

operating loss deduction carryforward or foreign tax credit carryforward

for the regular tax, the AMT credit has no time limit. Like these other

deductions and credits, the carryforward does not earn interest.

Therefore, taxpayers who use AMT credit carryforwards lose the time value

of money (potential interest) on the amount of AMT paid from the time AMT

liability is incurred until they can use the credit.

Page 32 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

This appendix contains information on the amount of corporate AMT

payments, the size of the firms paying AMT, the industry breakdown of

these firms, the frequency of AMT payments and AMT credits claimed, the

significant elements of AMT, and the relationship of AMT to net operating

losses (NOL) and to the foreign tax credit (FTC).

AMT Accounts for

Significant Revenues

From Corporations

Table II.1 shows regular tax and AMT revenues for the years since the

major revision of AMT in 1986. AMT revenues were between $2.7 and

$8.6 billion, or between 3 and 9 percent of the regular tax revenues

collected during the period. The table also shows that the use of the AMT

credit has grown as more firms that paid AMT use the credit against regular

tax liability.

Table II.1: Size of Regular Tax

Revenues, AMT Revenues, and AMT

Credits

Dollars in billions

Category 1987 1988 1989 1990 1991 1992

1992 dollars

Regular tax

revenue

$101.0 $106.2 $102.0 $93.4 $90.1 $96.0

AMT 2.7 4.0 3.9 8.6 5.4 4.9

AMT credits NA 0.6 0.9 0.7 1.5 2.3

Current year dollars

Regular tax

revenue

$83.5 $91.3 $91.5 $87.5 $87.6 $96.0

AMT 2.2 3.4 3.5 8.1 5.3 4.9

AMT credits NA 0.5 0.8 0.7 1.5 2.3

Note: NA means not applicable.

Source: GAO calculations based on Internal Revenue Service (IRS) Statistics of Income data.

Regular tax does not include tax from Subchapter S corporations.

AMT revenue is likely to decline in the future for several reasons. First, the

Omnibus Budget and Reconciliation Act (OBRA) of 1993 made two changes

that should reduce the number of taxpayers using AMT. OBRA eliminated the

ACE depreciation adjustment for property placed in service after 1993. The

Joint Committee on Taxation estimated that this change would reduce

revenue by about $4.3 billion from 1994 through 1998. OBRA also increased

the useful life for nonresidential real estate under the regular tax from 31.5

to 39 years. Because the 39 years is only slightly different from the 40

years for AMT purposes, less in AMT revenues related to this real estate can

be expected than otherwise.

Page 33 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

A second reason for the likely decline in AMT revenue is related to the

relatively short-lived equipment placed in service since the 1986 TRA that

has added to the depreciation adjustment. Much of this equipment should

reach the point in its useful life where depreciation under the AMT system

will be less than that under the regular tax, generating a negative

adjustment.

A third reason is that more taxpayers may be subject to the regular tax as

the economy moves out of the recession. With fewer taxpayers paying AMT,

AMT revenue should fall and recovery of past AMT credits should speed up.

While Few

Corporations Have

Paid AMT, Large

Firms Are More Likely

to Pay AMT

As table II.2 shows, only 0.7 to 1.5 percent of corporations paid AMT in any

given year. For example, about 32,000 of 2.1 million 1990 corporate returns

included AMT.

1

Table II.2: Percentage of All

Corporations Paying AMT AMT status 1987 1988 1989 1990 1991 1992

Paying AMT 0.7 1.1 1.1 1.5 1.5 1.3

Not paying AMT 99.3 98.9 98.9 98.5 98.5 98.7

Source: GAO calculations based on IRS Statistics of Income data.

Table II.3 shows that a high percentage of corporate AMT payers were

relatively small corporations. The relationship between firm size and AMT

payment stems from the fact that there are many more small corporations

than large corporations. For most of the years between 1987 and 1992,

more than 70 percent of AMT payers had less than $10 million in assets.

Large corporations represented a small percentage of AMT payers.

1

These figures do not include about 1.6 million Subchapter S corporation returns. S corporations are

taxed like partnerships and are not subject to the corporate AMT.

Page 34 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.3: Percentage of AMT Payers

by Size of Corporation Dollars in millions

Asset size class 1987 1988 1989 1990 1991 1992

$0 - less than $1 20.8 29.0 25.0 29.6 27.6 29.1

$1 - less than

$10

42.7 42.0 46.5 44.6 47.3 46.3

$10 - less than

$50

19.6 16.5 16.4 14.1 14.5 14.0

$50 - less than

$100

6.2 4.7 4.4 4.2 3.8 3.8

$100 - less than

$250

5.1 3.7 3.6 3.5 3.2 3.0

$250 - less than

$500

2.0 1.5 1.6 1.5 1.3 1.3

$500 - less than

$1,000

1.1 0.8 1.0 0.8 0.8 0.8

$1,000 and above 2.4 1.7 1.6 1.8 1.5 1.6

Note: Numbers may not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

Table II.4 shows the percentage of corporations in each size class that paid

AMT.

2

 While table II.3 showed that most AMT payers were relatively small,

small corporations were much less likely to be paying AMT than large

corporations. While less than half of 1 percent of corporations with less

than $1 million in assets were paying AMT, more than 20 percent of the

corporations with more than $1 billion in assets were. However, since

there were so many more small corporations than large ones, most AMT

payers were relatively small.

2

For a similar analysis of AMT liability by firm size and other calculations similar to those in this

appendix, see Geraldine Gerardi, Hudson Milner, and Gerald Silverstein, “Temporal Aspects of the

Corporate Alternative Minimum Tax: Results From Corporate Panel Data for 1987-1990,” Proceedings

of the Eighty-Fifth Annual Conference on Taxation, National Tax Association - Tax Institute of

America, 1992; and “The Effects of Corporate Alternative Minimum Tax: Additional Results From

Panel Data for 1987-1991,” Proceedings of the Eighty-Sixth Annual Conference on Taxation, National

Tax Association, 1993.

Page 35 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.4: Percentage of Corporate

Returns With AMT by Size of

Corporation

Dollars in millions

Asset size class 1987 1988 1989 1990 1991 1992

$0 - less than

$1

0.2 0.4 0.3 0.5 0.5 0.4

$1 - less than

$10

3.7 5.3 6.1 7.7 7.8 7.0

$10 - less than

$50

12.1 15.2 15.1 16.7 16.6 14.8

$50 - less than

$100

17.3 17.9 16.4 20.0 16.7 15.0

$100 - less than

$250

18.5 18.2 16.9 20.0 17.0 13.7

$250 - less than

$500

17.8 18.4 18.1 20.8 16.7 14.0

$500 - less than

$1,000

17.4 17.4 18.1 19.4 16.5 14.6

$1,000 and above 23.7 23.7 21.0 30.0 23.2 20.1

Source: GAO calculations based on IRS Statistics of Income data.

To further understand the relative importance of AMT, we calculated the

percentage of corporate assets that were in firms that paid AMT and in

those that did not. Because large corporations paid AMT more frequently,

the percentage of assets that were in firms paying AMT was much larger

than the percentage of taxpayers paying AMT. Thus, even though less than

2 percent of taxpayers paid AMT, table II.5 shows that about a quarter of

corporate assets were in firms that paid AMT.

Table II.5: Percentage of Total Assets

in Corporations by AMT Status AMT status 1987 1988 1989 1990 1991 1992

AMT 23 24 24 37 25 24

No AMT 77 76 76 63 75 76

Source: GAO calculations based on IRS Statistics of Income data.

Table II.6 shows the percentage of AMT liability paid by corporations by

asset size class. Despite the fact that most AMT payers were relatively

small, most AMT liability came from the largest firms. Referring to table

II.3, large corporations, generally comprising about 2 to 3 percent of AMT

payers, usually paid about 75 percent of AMT liability. In contrast, the

smallest two size classes contained 75 percent of AMT payers, but they paid

less than 10 percent of the AMT liability.

Page 36 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.6: Percentage of AMT Liability

by Size of Corporation Dollars in millions

Asset size class 1987 1988 1989 1990 1991 1992

$0 - less than

$1

3 2 3 1 2 1

$1 - less than

$10

5 5 5 3 4 4

$10 - less than

$50

6 6 6 3 5 6

$50 - less than

$100

3 3 3 2 3 3

$100 - less than

$250

5 5 5 3 5 5

$250 - less than

$500

5 4 6 4 4 5

$500 - less than

$1,000

4 5 8 6 6 8

$1,000 and above 68 70 64 78 71 67

Note: Numbers may not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

AMT Liability by

Industry

Table II.7 shows the percentage of firms paying AMT by industry. The

industry classifications are the major industry groups as defined by IRS.

The table shows that corporations in the mining, manufacturing, and

transportation industries were more likely to have paid AMT. Corporations

in wholesale and retail trade and services were less likely to have paid AMT.

Page 37 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.7: Percentage of Corporations

Paying AMT by Industry Industry 1987 1988 1989 1990 1991 1992

Agriculture 0.4 1.2 0.8 1.4 1.4 1.2

Mining 3.2 3.3 4.0 5.7 4.4 4.9

Construction 1.1 1.8 1.9 1.9 1.6 1.2

Manufacturing 1.2 2.2 2.3 3.5 3.7 3.5

Transportation

and public

utilities

1.2 1.9 2.6 2.9 3.0 2.9

Wholesale

trade

0.6 0.8 0.9 1.2 1.0 1.0

Retail trade 0.3 0.4 0.4 0.6 0.7 0.6

Finance,

insurance,

and real

estate

1.3 1.4 1.4 1.7 1.7 1.4

Services 0.3 0.6 0.6 0.9 0.8 0.9

Other 0.1 0.1 0.1 0.0 0.0 0.1

Overall

average

0.7 1.1 1.1 1.5 1.5 1.3

Source: GAO calculations based on IRS Statistics of Income data.

Table II.8 shows AMT liability by industry. The data show that the

manufacturing, transportation, and finance industries paid the most AMT.

Page 38 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.8: AMT Liability by Industry

1992 dollars in millions

Industry 1987 1988 1989 1990 1991 1992

Agriculture $8.6 $14.7 $19.3 $20.1 $20.4 $19.3

Mining 110.5 244.9 298.7 351.8 306.9 222.2

Construction 110.1 121.4 99.7 109.7 85.6 79.8

Manufacturing 861.4 1,709.5 1,320.7 3,647.2 1,946.9 1,822.2

Transportation

and public

utilities

584.4 533.1 835.2 1,931.8 1,186.6 970.5

Wholesale

trade

69.9 74.4 115.6 179.1 156.7 261.2

Retail trade 99.6 100.9 149.9 312.7 227.9 167.4

Finance,

insurance,

and real estate

718.5 933.3 903.4 1,772.4 1,333.4 1,107.2

Services 131.3 169.1 202.7 322.6 203.7 206.3

Other 0.6 0.2 0.6 0.0 0.0 0.0

Source: GAO calculations based on IRS Statistics of Income data.

In order to see the importance of AMT relative to the regular tax for

different industries, we calculated industry average tax rates for the

regular tax and for AMT. The regular tax rate is regular tax (not including

the AMT credit) divided by taxable income (as defined under the regular

tax). The AMT average tax rate is the regular tax and AMT less the AMT

credit, also divided by taxable income. The difference between the two

figures shows the extent to which AMT (both tax and credit) changes the

aggregate tax payment of the industry. Table II.9 shows that AMT generally

resulted in relatively small changes at the industry level.

Page 39 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.9: Average Tax Rates

(Percentages of Taxable Income)

Without and With AMT by Industry

Industry 1987 1988 1989 1990 1991 1992

Agriculture 27/27 24/25 25/26 26/26 24/25 24/25

Mining 29/33 18/22 19/24 19/24 17/23 18/23

Construction 29/31 26/27 26/27 27/28 25/26 25/26

Manufacturing 25/25 20/21 21/21 20/22 20/21 21/21

Transportation

and public

utilities

36/37 29/30 31/32 31/35 31/33 32/33

Wholesale trade 34/34 27/28 29/30 29/30 28/28 27/28

Retail trade 34/34 29/29 30/30 28/30 30/30 30/30

Finance,

insurance, and real estate

37/38 28/29 30/31 28/31 32/33 30/30

Services 27/27 24/25 26/27 26/28 27/28 28/28

Other 27/27 20/20 25/26 23/23 24/24 13/13

Source: GAO calculations based on IRS Statistics of Income data.

As requested, we computed the same information for eight industry

subclasses. Table II.10 shows the percentage of firms paying AMT in these

industry subclasses. The percentage of corporations that paid AMT in these

subclasses was above the average for all corporations, with the possible

exception of utilities due to the statistical imprecision in the percentage of

that subclass.

Table II.10: Percentage of Corporations

Paying AMT in Eight Industry

Subclasses

Industry 1987 1988 1989 1990 1991 1992

Auto 2.0 2.3 3.4 6.6 7.6 5.5

Steel 1.5 3.4 5.4 6.2 5.5 4.8

Chemicals 2.3 2.2 2.7 4.7 4.8 5.9

Utilities 1.5 2.5 2.9 2.5 2.9 3.4

Transportation 1.2 1.9 2.5 2.9 2.9 2.8

Paper 6.9 3.2 7.0 8.2 8.9 9.7

Oil and gas

extraction

2.4 2.8 3.3 5.1 4.0 4.1

Mining (other

than oil)

6.3 5.1 6.7 8.0 5.7 7.9

Overall average 0.7 1.1 1.1 1.5 1.5 1.3

Note: The estimate for utilities for 1990, the only year for which we examined the statistical

significance of the utilities estimate, was not significantly different from the overall average at a

95-percent level of confidence.

Source: GAO calculations based on IRS Statistics of Income data.

Page 40 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.11 shows AMT liability for these industries.

Table II.11: AMT Liability for Eight

Industry Subclasses 1992 dollars in millions

Industry 1987 1988 1989 1990 1991 1992

Auto $50.9 $174.7 $45.5 $999.5 $31.3 $136.7

Steel 25.6 44.7 54.4 49.0 23.0 29.8

Chemicals 86.2 81.6 173.4 500.8 244.2 306.6

Utilities 418.8 343.2 523.0 841.5 642.4 629.3

Transportation 147.3 121.7 177.8 467.1 259.9 213.6

Paper 81.0 60.7 58.4 172.3 252.1 223.5

Oil and gas

extraction

39.3 67.1 104.7 174.4 232.5 80.8

Mining (other

than oil)

71.2 177.8 194.0 177.5 74.4 141.3

Source: GAO calculations based on IRS Statistics of Income data.

Table 11.12 shows the average tax rate without and with AMT for these

eight industry subclasses.

Table II.12: Average Tax Rates

(Percentages of Taxable Income)

Without and With AMT by Industry

Subclass

Industry 1987 1988 1989 1990 1991 1992

Auto 30/31 17/18 13/14 6/20 24/28 24/28

Steel 34/36 27/28 30/32 30/34 31/33 30/32

Chemicals 23/24 19/19 18/18 17/19 16/17 17/17

Utilities 35/37 29/30 31/33 31/35 32/34 32/35

Transportation 35/37 29/30 28/30 29/36 29/33 26/33

Paper 35/36 27/28 28/28 26/28 25/30 28/29

Oil and gas

extraction

18/21 11/13 16/18 15/19 14/20 15/16

Mining (other

than oil)

41/46 27/34 24/34 27/35 25/30 24/32

Source: GAO calculations based on IRS Statistics of Income data.

AMT Significantly

Increased Tax

Liability for Some

Taxpayers

For many AMT payers, AMT led to a large percentage increase in taxes owed.

To determine whether AMT led to only very small tax changes or to large

tax changes for AMT payers, we calculated the percentage increase in tax

from AMT. For AMT taxpayers who had no regular tax liability, AMT was

100 percent of the taxes paid. As shown in appendix III (table III.8), about

Page 41 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

40 percent of AMT payers owed no regular tax in the year they paid AMT.

Table II.13 shows the percentage increase in tax resulting from AMT for AMT

taxpayers who also had positive regular tax liability. In 1990, for example,

8.5 percent of AMT payers had their total tax increased by less than

5 percent by AMT. On the other hand, a third of AMT payers had their taxes

at least doubled by AMT.

Table II.13: Percentage of AMT Payers

by Percentage Increase in Tax Due to

AMT

Percent 1987 1988 1989 1990 1991 1992

0 - 5 13.5 9.8 10.4 8.5 8.1 11.8

More than 5

≤ 10

6.7 9.3 7.1 6.2 6.0 6.4

More than

10 ≤ 25

16.1 15.7 14.3 14.2 15.9 14.9

More than

25 ≤ 50

14.3 17.1 15.0 19.3 15.3 20.4

More than

50 ≤ 100

15.6 16.3 17.9 18.7 19.0 15.7

Above 100 33.8 31.8 35.3 33.2 35.6 30.8

Note: Numbers may not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

About Half of Large

Corporations Paid

AMT at Some Time

In order to see whether corporations paid AMT consistently between 1987

and 1991 or fluctuated between the regular tax and AMT, it is necessary to

track individual corporations over time. To do this, we developed a

database containing 5 years of tax returns for corporations that had total

assets of more than $50 million in each year from 1987 through 1991.3

 This

database also allows us to determine how quickly AMT payers were able to

use the AMT credit.4

 Of the approximately 10,000 corporations in the

database, about 50 percent did not pay AMT at any time over the 5-year

period, as shown in table II.14. Very few (about 3.2 percent of AMT payers,

or about 1.6 percent of the 10,000 corporations in the database) paid AMT

in all 5 years. The greatest percentage of AMT payers paid once in the 5

years. Table II.14 also shows the percentage of assets in different

categories as a percentage of the sum of all corporate assets over the 5

years.

3

Due to time constraints, we were not able to incorporate 1992 data into this database.

4

Gerardi, Milner, and Silverstein analyzed AMT using a similar database. The database we used

contained about 800 more companies because we were able to use the final rather than the preliminary

SOI data to develop our database. However, in those cases where we performed similar calculations,

our results were generally very close to theirs.

Page 42 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.14: Percentage of $50+ Million

Corporations Paying AMT by the

Number of Years Paying AMT and

Percentage of Corporate Assets in

Those Corporations

Never paid

AMT 1 year 2 years 3 years 4 years 5 years

Corporations 

(percent)

51.0 20.2 14.2 8.6 4.4 1.6

Assets 

(percent)

33.8 24.0 19.1 14.3 7.3 1.5

Source: GAO database developed from IRS Statistics of Income data.

To understand whether corporations tended to pay AMT in consecutive

years or moved back and forth between AMT and the regular tax, we

tracked the years that taxpayers paid and did not pay AMT. Table II.15

shows the percentage of taxpayers that paid AMT in consecutive years by

the number of years that they paid AMT. About two-thirds of the

corporations that paid AMT twice in the 5 years did so in consecutive years.

About half of 3-year payers paid in 3 consecutive years.

Table II.15: Percentage of AMT Payers

With Consecutive Years Paying AMT

by Number of Years Paying AMT

Number of years

paying AMT

Percentage

paying for no

consecutive

years

Percentage

paying for 2

consecutive

years

Percentage

paying for 3

consecutive

years

Percentage

paying for 4

consecutive

years

2 33 67 NA NA

3 8 38 53 NA

4 NA 11 23 66

Note: Percentages may not add to 100 percent across the table due to rounding. NA means not

applicable.

Source: GAO database developed from IRS Statistics of Income data.

To determine how long it took AMT payers to recover their payments via

the AMT credit, we calculated the percentage of firms that had fully

recovered their payment by year of AMT liability. In making this calculation,

we assumed that receipt of an AMT credit recovered the first possible year

of AMT payments. Table II.16 shows that the majority of AMT payers for tax

year 1987 had not fully recovered their 1987 AMT payment via the AMT

credit by the 1991 tax year.

Page 43 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.16: Percentage of AMT Payers

That Recovered AMT Liability, by Tax

Year of AMT Liability

Tax year that AMT was recovered Tax year of AMT

liability 1988 1989 1990 1991

Not fully

recovered

1987 13.7 11.9 7.4 8.1 58.8

1988 NA 11.3 7.8 9.0 71.9

1989 NA NA 8.3 10.9 80.8

1990 NA NA NA 3.0 97.0

Note: NA means not applicable.

Source: GAO database developed from IRS Statistics of Income data.

Table II.17 shows the percentage of AMT payments recovered via the AMT

credit. In contrast to the preceding table, table II.17 shows the amount of

credit recovered by firms that fully recovered their AMT payment and by

those that only partially recovered their credits. These calculations also

assume that credits claimed are allocated to the first year of AMT liability

for which AMT has not been fully recovered. The table shows that less than

half of 1987 AMT liability had been recovered via the AMT credit by 1991.5

Table II.17: Percentage of AMT

Payment Recovered by All AMT Credit

Claimants, by Year of AMT Liability

Tax year that AMT was recovered

Year of AMT liability 1988 1989 1990 1991 Total recovered

1987 20.6 14.1 3.1 5.8 43.6

1988 NA 16.0 3.3 4.7 24.0

1989 NA NA 11.5 9.3 20.8

1990 NA NA NA 7.0 7.0

Note: NA means not applicable.

Source: GAO database developed from IRS Statistics of Income data.

Table II.18 shows the percentage of corporations and the percentage of

assets of firms in the database that either paid AMT or paid regular tax and

had not been able to reclaim all outstanding AMT credits in a particular

year. The data indicate that about 40 percent of the large corporations in

the database were in this position after tax year 1991. This percentage may

have fallen in tax year 1992 as the amount of AMT credits claimed rose

significantly, as shown in table II.1.

5

Gerardi, Milner, and Silverstein performed this calculation for their database and found faster

recovery of credits. For example, they found that 65.8 percent of 1987 AMT payments had been

recovered through tax year 1991.

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Appendix II 

Which Corporations Paid AMT and Why?

Table II.18: Percentage of Firms in

GAO Database Either Paying AMT or

Having Unused AMT Credits and

Percentage of Assets in Those Firms

1987 1988 1989 1990 1991

Corporations

(percent)

19 27 31 38 40

Assets (percent) 24 32 36 54 52

Source: GAO database developed from IRS Statistics of Income data.

We also calculated the length of time that corporations spent either paying

AMT or recovering credits. Table II.19 shows the percentage of

corporations that either paid AMT or had unusable AMT credits by the

number of years that they were in this position. For example, the table

shows that 9.2 percent of companies paid AMT or had unusable credits in

only 1 year, which means that they paid AMT in 1 year and fully recovered

the payment with the AMT credit in the following year. About 10 percent of

firms either paid AMT in 2 years and recovered their credits in the next year

or they paid AMT in 1 year and were unable to recover credits for an

additional year. Thirteen percent of the companies either paid AMT or had

outstanding credits in all 5 years. These firms could have been AMT payers

in all 5 years, paid AMT once but never recovered their credits, or paid AMT

in several years and never recovered credits. Thus, while table II.14

showed that only 1.6 percent of the companies in the database paid AMT in

all 5 years, 13 percent of the companies were either paying AMT or had

excess AMT credits in all 5 years.

Table II.19: Percentage of $50+ Million

Corporations Either Paying AMT or

Having Excess AMT Credits by the

Number of Years in This Position and

Percentage of Corporate Assets in

Those Corporations

Never paid

AMT 1 year 2 years 3 years 4 years 5 years

Corporations 

(percent)

51.0 9.2 9.7 7.9 9.0 13.2

Assets 

(percent)

33.8 10.3 18.3 10.4 14.6 12.6

Source: GAO database developed from IRS Statistics of Income data.

The Book/ACE

Adjustment and

Depreciation Were the

Most Significant AMT

Components

Table II.20 shows the relative size of the AMT preferences and adjustments.

As can be seen, the book income and ACE adjustments were relatively

large. The replacement of the book income adjustment with the ACE

adjustment coincided with a large increase in the amount of the

adjustment. Before 1990, the book income adjustment had been declining

in importance.

Page 45 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

The depreciation adjustment for post-1986 property grew as more

depreciable assets were placed into service after the introduction of the

adjustment. As time passes from the imposition of the tax, more new

assets are put into service, increasing the adjustment. At the same time,

more assets reach the point where depreciation is greater under the AMT

rules than under the regular tax, leading to a negative adjustment. A

similar pattern is apparent for the depreciation preferences related to

pre-1986 assets; as time passes, fewer assets generate positive adjustment

amounts.

Compared to the book/ACE adjustment and post-1986 property

depreciation, the other components of AMTI were small overall, although

they could be important for particular firms or industries.

Page 46 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.20: AMT Preferences and

Adjustments 1992 dollars in millions

Item 1987 1988 1989 1990 1991 1992

Adjustments

Book income or ACE $26,107 $23,240 $15,779 $52,136 $25,876 $18,893

Depreciation (post1986 property)3,976 10,638 16,164 30,040 23,028 22,843

Pollution facilities –15 47 21 NA NA 21

Mining development 179 319 324 295 195 108

Basis –47 –422 –904 NA NA –3,368

Long-term contracts 1,504 1,125 1,471 NA NA 95

Installment sales 304 –535 –178 NA NA –14

Merchant marine

construction

40 5 1 NA NA 31

Section 833 

deduction

17 9 664 NA NA 1,478

Farm losses 27 0 13 NA NA 0

Passive losses 168 125 38 NA NA 34

Preferences

Depletion 1,351 1,870 2,224 1,489 925 1,620

Tax-exempt bonds 19 41 77 544 167 128

Appreciated property

charitable 

deduction

48 33 64 73 81 82

Intangible drilling costs 247 171 145 376 232 176

Reserves for bad 

debts

91 41 30 NA NA 86

Accelerated

depreciation of 

real property

19 499 353 397 186 108

Accelerated

depreciation of 

personal property

10 16 16 6 NA 4

Amortized pollution 

control facilities

22 12 9 NA NA NA

Note: NA means not available. For tax years 1990 and 1991, Statistics of Income entered fewer

items from many corporate tax returns into its database, including items from the AMT form. Also,

the estimates for several of the smaller adjustments and preferences are based on small samples

and are thus imprecise. The amounts reported are from AMT payers only, and the adjustment

amounts are net of negative adjustments.

Source: GAO calculations based on IRS Statistics of Income data.

Page 47 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

The importance of the depreciation and the book income and adjusted

current earnings adjustments is also apparent from data on the frequency

of occurrence of different AMT components, as table II.21 shows. These

items increased AMTI for most AMT payers. In contrast, the other

preferences and adjustments increased AMTI for only a small percentage of

AMT payers.

Table II.21: Percentage of AMT Payers

With Adjustments and Preferences Item 1987 1988 1989 1990 1991 1992

Depreciation

adjustment

65 79 84 86 86 87

Mining development

adjustment

1 1 1 0 0 1

Depletion

preference

5 4 5 5 4 4

Intangible

drilling preference

2 1 1 1 1 1

Tax-exempt income

preference

1 1 1 1 1 1

Accelerated

depreciation preferences

21 15 13 12 10 9

ACE/book income

adjustment

48 45 41 65 86 67

Source: GAO calculations based on IRS Statistics of Income data.

AMT Limits Tax

Credits and

Deductions for Prior

Losses

In order to ensure at least a small tax liability from corporations with prior

year losses and foreign tax credits, the AMT rules include limits on the

amounts these deductions and credits can reduce AMTI and AMT. The rules

also include an overall limit on the amount by which both the AMT net

operating loss deduction and the AMT FTC together can reduce AMT liability.

To determine how these rules affected AMT payers, we calculated the

percentage of AMT payers that included NOLs and FTCs in their AMT

computations. We also calculated the percentage by which AMT payers

were able to reduce AMTI and AMT before credits, respectively, to determine

whether the limitations had prevented firms from fully claiming

deductions and credits.

Table II.22 shows the percentage of AMT payers that claimed a deduction

for prior year net operating losses. The table shows that about a third of

Page 48 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

AMT payers claimed the deduction, and in recent years the deduction

reduced tentative AMTI by about 15 percent.

Table II.22: Percentage of AMT Payers

With Deduction for AMT NOL 1987 1988 1989 1990 1991 1992

Percentage of AMT 

payers with AMT

NOL deduction

36 37 33 33 30 32

Percentage of AMT 

payers with no 

AMT NOL deduction

64 63 67 67 70 68

Overall reduction

in AMTI from AMT 

NOL deduction

36 34 31 13 16 17

Source: GAO calculations based on IRS Statistics of Income data.

To determine whether corporations were constrained by the 90-percent

net operating loss limit, we calculated the percentage reduction in AMTI for

AMT payers who had a deduction for AMT net operating losses. Table II.23

shows that a significant percentage of AMT payers with NOL deductions may

have been constrained by the limitation.

Table II.23: Percentage of AMT Payers

With AMT NOL Deductions by Size of

AMT NOL Deduction Relative to AMTI

Before Losses

Percentage reduction in

AMTI from AMT NOL 1987 1988 1989 1990 1991 1992

90 percent (at

limit)

65 60 62 56 55 59

Above 75 through 89

percent

4 6 5 5 3 5

Above 50 through 75

percent

9 7 8 10 12 7

Above 25 through 50

percent

10 15 10 11 14 13

0 through 25 percent 12 13 15 20 17 15

Note: Numbers may not add to 100 percent because of rounding.

Source: GAO calculations based on IRS Statistics of Income data.

AMT payers can also claim AMT foreign tax credits for foreign taxes paid.

Table II.24 shows that despite the fact that very few AMT payers claimed an

AMT FTC, the credit reduced AMT before credits to a large extent on an

aggregate level.

Page 49 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.24: Percentage of AMT Payers

Claiming AMT FTC and Resulting

Reduction in Aggregate AMT

1987 1988 1989 1990 1991 1992

Percent of AMT 

payers with AMT FTC

2 2 3 3 3 3

Percent of AMT payers 

without AMT FTC

98 98 97 97 97 97

Overall percentage

reduction in AMT

before credits from

AMT FTC

33 43 31 30 33 32

Source: GAO calculations based on IRS Statistics of Income data.

Table II.25 shows the distribution of the percentage reduction of AMT

before credits for corporations that claimed AMT FTC. The credit cannot be

used to reduce AMT before credits by more than 90 percent. The table

indicates that between 25 and 37 percent of AMT FTC claimants may have

been constrained by the limitation.

Table II.25: Percentage of AMT Payers

With AMT FTC by Size of AMT FTC

Relative to AMT Before Credits

Percentage reduction in

TAMT from AMT FTC 1987 1988 1989 1990 1991 1992

90 percent (at

limit)

27 37 30 25 28 27

Above 75 through 89

percent

5 11 6 5 6 7

Above 50 through 75

percent

9 9 12 10 10 10

Above 25 through 50

percent

9 11 10 9 10 9

0 through 25 percent 50 32 43 52 45 47

Note: Numbers may not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

Taxpayers who claim the AMT NOL deduction and/or AMT FTC are also

subject to an overall limit. The AMT NOL deduction and AMT FTC combined

cannot reduce AMT liability by more than 90 percent. Few taxpayers

claimed both NOL and FTC. Table II.26 shows the extent to which AMT

payers reduced AMTI through the use of the credit and the deduction. It

shows that the percent of firms that may have been constrained by the

overall limitation varied, ranging from 29 percent in 1989 to 49 percent in

1992.

Page 50 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix II 

Which Corporations Paid AMT and Why?

Table II.26: Percentage of AMT Payers

With AMT NOL and FTC by Size of

AMT NOL and FTC Relative to AMTI

Percentage reduction in

AMTI from AMT FTC and

AMT NOL 1987 1988 1989 1990 1991 1992

90 percent (at

limit)

33 42 29 31 41 49

Above 75 through 89

percent

10 15 10 14 9 7

Above 50 through 75

percent

23 18 32 16 13 12

Above 25 through 50

percent

19 13 8 13 10 10

0 through 25 percent 15 12 21 26 28 23

Note: Numbers may not add to 100 percent due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

Page 51 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix III 

Has AMT Achieved Its Goals?

According to the legislative history, the goals of AMT are to ensure that

taxpayers with substantial economic income pay some tax, and to ensure

that taxpayers with positive book income pay tax in the year of positive

income.

Is AMT Designed to

Tax Economic

Income?

Because we are not aware of the existence of an agreed-upon, detailed

definition of economic income for corporations, we compared AMT to the

proposals made by the Department of the Treasury in November 1984.1

The Treasury proposals were designed to tax the real economic income of

individuals and businesses, both corporate and noncorporate. We also

compared the AMT provisions to the Joint Committee on Taxation’s list of

corporate tax expenditures, which are generally preferences and

exclusions in the regular tax that deviate from a tax on economic income.

The Treasury proposals provide a broad outline of a corporate tax based

on economic income; the tax expenditure list goes into greater detail on

particular tax code provisions.

Our comparisons showed that AMT moves the tax system closer to taxing

economic income by including several tax preferences. In addition, firms

paying AMT will have depreciation deductions that more closely match

economic depreciation than do depreciation deductions under the regular

tax if inflation rates are low. However, if inflation is moderate or high,

depreciation deductions under AMT can be less generous than estimates of

economic depreciation would dictate, leading to an overstatement of

economic income. In times of moderate or high inflation, the

overstatement of income due to the depreciation provisions may indirectly

reduce the understatement of income that occurs when corporations

deduct nominal, rather than inflation-adjusted, interest costs on debt

incurred to finance investments. However, such indirect effects would not

apply to investments financed by equity.

Treasury Proposal Treasury proposed three major structural changes to the corporate tax in

order to tax economic income.

• First, it proposed that the double taxation of dividends be reduced. Under

the regular corporate tax, dividends are taxed when received by

shareholders but are not deducted by the corporation when paid. In

1

Tax Reform for Fairness, Simplicity, and Economic Growth (Washington, D.C.: U.S. Department of

the Treasury, November 1984).

Page 52 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix III 

Has AMT Achieved Its Goals?

contrast, interest paid is taxed when received by bondholders and is

deducted by the corporation.

• Second, Treasury proposed that capital assets, inventories, and interest

paid be indexed to inflation.

• Third, Treasury recommended that depreciation schedules be adjusted to

more closely match estimates of economic depreciation. Economic

depreciation is the reduction in the market value of a particular asset over

a year. If the tax provisions for depreciation deductions matched

economic depreciation, businesses would deduct the actual reduction in

the value of their assets as a business cost each year.

Treasury maintained that these provisions and a reduction in the

preferences and exclusions in the tax code would result in a tax more

closely based on economic income. Using this proposal as a basis for

comparison, we analyzed the tax base of AMT to judge whether AMT has

moved the tax base closer to economic income.

First, AMT does not relieve the double taxation of dividends. The ACE

adjustment further restricts the deductibility of dividends received by

corporations and therefore moves the tax base further from a definition of

economic income and closer to book income, reflecting another goal of

AMT.

Second, AMT does nothing explicitly to adjust for inflation. Many items in

the Treasury proposal related to the mismeasurement of income due to

inflation. Inflation reduces the value of depreciation deductions because

the amount of depreciation deducted reflects the historical cost of the

asset when purchased, not its current replacement value. On the other

hand, inflation increases the real value of the deduction for interest paid

because interest costs unadjusted for inflation are deducted rather than

the inflation-adjusted interest costs. However, the Tax Reform Act of 1986

did not include comprehensive indexing provisions.2

Third, AMT depreciation schedules are closer to economic income at 0

percent inflation, but not when the inflation rate is 3 percent or higher.

The data in appendix II showed that the depreciation adjustment is a key

component of AMT, responsible for $23 billion of AMTI and included on

87 percent of AMT returns in 1992. The question then is whether the AMT

depreciation provisions are closer to economic depreciation than the

2

For a discussion of plans for explicit indexing and the implicit indexing in the tax code, see Daniel

Halperin and Eugene Steuerle, “Indexing the Tax System for Inflation,” in Henry J. Aaron, Harvey

Galper, and Joseph Pechman, eds., Uneasy Compromise: Problems of a Hybrid Income-Consumption

Tax (Washington, D.C.: The Brookings Institution, 1988).

Page 53 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix III 

Has AMT Achieved Its Goals?

provisions under the regular tax. Under the current tax system,

depreciation deductions are calculated using the historical cost of

acquiring the asset. Because neither the regular tax nor the AMT

depreciation schedules include adjustments for inflation, the value of

these deductions erodes as the inflation rate increases. One justification

for accelerating depreciation relative to economic depreciation is to offset

the effects of inflation.

Table III.1 shows one set of estimates of the present value of depreciation

deductions under the regular tax and AMT per dollar invested in 22 types of

equipment and 6 types of structures, for different inflation rates. The table

also shows estimates for the present value of economic depreciation for

these asset classes. If the value for the regular tax or AMT for a particular

asset is greater than that for economic depreciation, the tax schedules

allow a more generous deduction than economic depreciation. If the

values are smaller, the tax schedules allow for slower, less generous

depreciation deductions.

For example, if a corporation purchases an automobile, it is entitled to

depreciation deductions over the useful life that will eventually total the

purchase price of the auto. However, since the deductions occur over

time, they are worth less than the purchase price today. Table III.1

indicates that with no inflation, depreciation deductions under the regular

tax today are worth 91 percent of the original investment, 89 percent

under AMT depreciation, and 87 percent under economic depreciation. The

table also shows the effects of inflation on depreciation deductions for

regular tax and AMT; as inflation increases from 0 to 3 to 6 percent, the

present value of depreciation deductions falls.3

3

These estimates were provided by Jane Gravelle of the Congressional Research Service. Ms.

Gravelle’s estimates assumed a 5-percent real discount rate. The estimates of economic depreciation

are based on Charles R. Hulten and Frank Wykoff, “The Measurement of Economic Depreciation,” in

Charles R. Hulten, editor, Depreciation, Inflation, and the Taxation of Income from Capital

(Washington, D.C.: Urban Institute Press, 1981).

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Appendix III 

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Table III.1: Present Value of

Depreciation Under Regular Tax, AMT,

and Economic Depreciation

Regular tax

depreciation at

different inflation levels

AMT depreciation at

different inflation levels

0% 3% 6% 0% 3% 6% Economic

Equipment

Autos 0.9054 0.8553 0.8094 0.8928 0.8363 0.7849 0.8695

Office 0.9054 0.8553 0.8094 0.8928 0.8363 0.7849 0.8451

Trucks 0.9054 0.8553 0.8094 0.8831 0.8223 0.7676 0.8353

Aircraft 0.8748 0.8112 0.7547 0.7768 0.6768 0.5954 0.7842

Construction 

machinery

0.9054 0.8553 0.8094 0.8734 0.8083 0.7502 0.7749

Mining and oil field 0.8715 0.8065 0.749 0.7768 0.6768 0.5954 0.7674

Service 0.8715 0.8065 0.749 0.8186 0.7322 0.6589 0.7674

Tractors 0.8815 0.8206 0.7663 0.8204 0.7345 0.6616 0.7655

Instruments 0.8605 0.793 0.7346 0.7548 0.6485 0.564 0.7465

Other 0.8715 0.8065 0.749 0.7849 0.6873 0.6073 0.7465

General industrial 0.8597 0.7926 0.7348 0.7657 0.6624 0.5793 0.7101

Metal working 0.8765 0.8135 0.7576 0.8083 0.7138 0.6427 0.7101

Electric

transmission

0.7829 0.693 0.6223 0.6913 0.5709 0.4812 0.7022

Communication 0.9054 0.8553 0.8094 0.8015 0.7092 0.6323 0.7022

Other electric 0.8715 0.8065 0.749 0.78 0.681 0.6001 0.7022

Furniture and 

fixtures

0.8715 0.8065 0.749 0.8015 0.7092 0.6323 0.6875

Special industrial 0.8798 0.8183 0.7634 0.7768 0.6768 0.5954 0.6734

Agricultural 0.8715 0.8065 0.749 0.8015 0.7092 0.6323 0.66

Fabricated metals 0.7873 0.6993 0.6301 0.694 0.5741 0.4845 0.6771

Engines and

turbines

0.6732 0.5502 0.4605 0.6253 0.4958 0.4059 0.6111

Ships and boats 0.8242 0.7413 0.6714 0.682 0.5599 0.4699 0.6

Railroad 0.8715 0.8065 0.749 0.774 0.6685 0.5891 0.5689

Structures

Mining, oil,

and gas

0.8961 0.8889 0.8823 0.8782 0.8292 0.7903 0.57

Other 0.4398 0.3063 0.2299 0.4323 0.2997 0.2244 0.4758

Industrial 0.4398 0.3063 0.2299 0.4323 0.2997 0.2244 0.3975

Public utility 0.6732 0.5502 0.4605 0.5727 0.4401 0.3532 0.3872

Commercial 0.4398 0.3063 0.2299 0.4323 0.2997 0.2244 0.315

Farm 0.6564 0.5304 0.4401 0.5986 0.4671 0.3784 0.3215

Source: Jane Gravelle, Congressional Research Service.

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Appendix III 

Has AMT Achieved Its Goals?

Table III.2 shows the percentage difference between economic

depreciation and regular and AMT depreciation. The table shows that the

current regular tax depreciation schedule is generous relative to economic

depreciation when there is no inflation and in most cases when inflation is

3 percent. AMT depreciation is closer to economic depreciation than

regular depreciation at 0-percent inflation, but for 3- or 6-percent inflation

it is less generous than economic depreciation for many assets. As the

inflation rate rises to 6 percent, both regular tax and AMT would be less

generous than economic depreciation would dictate for many assets.

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Appendix III 

Has AMT Achieved Its Goals?

Table III.2: Percentage Difference in

Present Value of Regular Tax and AMT

Depreciation From Economic

Depreciation

Differences for regular tax

depreciation schedules at

different inflation levels

Differences for AMT

depreciation schedules at

different inflation levels

0% 3% 6% 0% 3% 6%

Equipment

Autos 4.1% –1.6% –6.9% 2.7% –3.8% –9.7%

Office/computers 7.1 1.2 –4.2 4.9 –1.7 –7.8

Trucks 8.4 2.4 –3.1 5.7 –1.6 –8.1

Aircraft 11.6 3.4 –3.8 –0.9 –13.7 –24.1

Construction 

machinery

16.8 10.4 4.5 12.7 4.3 –3.2

Mining/oil field 13.6 5.1 –2.4 1.2 –11.8 –22.4

Service 13.6 5.1 –2.4 6.7 –4.6 –14.1

Tractors 15.2 7.2 0.1 7.2 –4.0 –13.6

Instruments 15.3 6.2 –1.6 1.1 –13.1 –24.4

Other 16.7 8.0 0.3 5.1 –7.9 –18.6

General industrial 21.1 11.6 3.5 7.8 –6.7 –18.4

Metal working 23.4 14.6 6.7 13.8 0.5 –9.5

Electric transmission 11.5 –1.3 –11.4 –1.6 –18.7 –31.5

Communication 28.9 21.8 15.3 14.1 1.0 –10.0

Other electric 24.1 14.9 6.7 11.1 –3.0 –14.5

Furniture and 

fixtures

26.8 17.3 8.9 16.6 3.2 –8.0

Special industrial 30.7 21.5 13.4 15.4 0.5 –11.6

Agricultural 32.0 22.2 13.5 21.4 7.5 –4.2

Fabricated metals 16.3 3.3 –6.9 2.5 –15.2 –28.4

Engines and turbines 10.2 –10.0 –24.6 2.3 –18.9 –33.6

Ships and boats 37.4 23.6 11.9 13.7 –6.7 –21.7

Railroad 53.2 41.8 31.7 36.1 17.5 3.6

Structures

Mining, oil, and gas 57.2 55.9 54.8 54.1 45.5 38.6

Other –7.6 –35.6 –51.7 –9.1 –37.0 –52.8

Industrial 10.6 –22.9 –42.2 8.8 –24.6 –43.5

Public utility 73.9 42.1 18.9 47.9 13.7 –8.8

Commercial 39.6 –2.8 –27.0 37.2 –4.9 –28.8

Farm 104.2 65.0 36.9 86.2 45.3 17.7

Source: GAO calculations based on data in table III.1.

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Appendix III 

Has AMT Achieved Its Goals?

To the extent that the AMT depreciation provisions are less generous than

economic depreciation at moderate or high inflation rates, they tend to

overstate economic income. However, as mentioned above, interest

expenses are overstated in real terms when inflation exists. In this

context, AMT may indirectly offset this inflation advantage for corporations

with sizeable debt-financed capital investment and function as an implicit

limit on interest deductions.

Whether such a limit is consistent with a tax on economic income depends

largely on whether the personal tax is considered as well as the corporate

tax. While corporations deduct interest unadjusted for inflation, this

interest is in turn taxed when received at the individual level. Thus,

income earned by the corporation is in fact taxed, but the revenue is

received through the individual income tax rather than the corporate tax.

However, many individuals are taxed at a rate lower than the corporate

rate, so the deduction at the corporate level reduces taxes by an amount

more than taxes are raised at the individual level. In addition, if the

recipient of the interest is a pension fund, no tax is levied until the income

is ultimately received by the pension recipient.4

For shareholders, corporate income can be received as dividends or as

capital gains when stock shares are sold. Dividends are not deductible

under the corporate tax, so there is no inflation-driven advantage at the

corporation level for dividends. Capital gains are taxed on their amount

unadjusted for inflation, overstating their real value, but have commonly

been taxed under preferential rates and are taxed only when shares are

sold (realized), allowing potentially substantial tax deferral. While AMT

depreciation provisions may indirectly counteract inflation biases for debt

at the corporate level, they do not do so for income received by

shareholders.

AMT Includes Several Tax

Expenditures in Its Base

AMT adjustments and preferences include some, but not all, tax

expenditures to broaden the tax base and move the tax base closer to

economic income. Table III.3 shows corporate tax expenditures, as

defined by the Joint Committee on Taxation, that have an estimated

revenue loss of over $100 million in 1995. The table shows which tax

4

For an analysis of limits on interest deductibility, see Alan J. Auerbach, “Should Interest Deductions

Be Limited?” in Uneasy Compromise cited above.

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Appendix III 

Has AMT Achieved Its Goals?

expenditures are included directly in AMT as preferences or adjustments

and which are included indirectly through the ACE adjustment.5

Table III.3: AMT Tax Base and

Corporate Tax Expenditures

Tax expenditure

AMT preference or

adjustment

Included in ACE

adjustment

Accelerated depreciation of equipment yes yes until 1993

Accelerated depreciation of buildings

other than rental housing

yes yes until 1993

Accelerated depreciation on rental housing yes yes until 1993

Exclusion of interest on private purpose

tax-exempt bonds

yes yes

Exclusion of interest on governmental

tax-exempt bonds

no yes

Exclusion of income of foreign sales

corporations

no yes

Inventory property sales source rules

exemption

no no

Deferral of income from controlled foreign

corporations

no no

Interest allocation rules exception for

certain nonfinancial corporations

no no

Expensing of research and development

expenditures

no no

Expensing of exploration and development

costs (fuels and nonfuel minerals)

yes yes

Excess of percentage over cost depletion

(fuels and nonfuel minerals)

yes yes

Nonconventional fuel production credit yes no

Expensing of multiperiod timber growing

costs

no no

Investment tax credit for rehabilitation of

historic structures

yes no

Cash accounting for agriculture no no

Excess bad debt reserves of financial

institutions

yes no

Exclusion of interest on life insurance

savings

no yes

Small life insurance company taxable

income adjustment

no yes

Special treatment of life insurance

company reserves

no no

(continued)

5

In addition to other specific adjustments, if an amount is permanently excluded from gross income for

purposes of determining AMTI, that amount must be included in ACE. This list was compiled using the

specific adjustments for ACE in Internal Revenue Code section 56(g)(4) and by applying general

earnings and profit principles. We consulted appropriate IRS officials in developing this table.

Page 59 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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Has AMT Achieved Its Goals?

Tax expenditure

AMT preference or

adjustment

Included in ACE

adjustment

Deduction of unpaid property loss

reserves for property and casualty

insurance companies

no no

Special Blue Cross/Blue Shield deduction yes yes

Low-income housing credit yes no

Expensing of up to $17,500 of depreciable

business property

no yes

Reduced rates for first $10 million of

corporate taxable income

no no

Deferral of gain on nondealer installment

sales

yes yes

Completed contract rules yes yes

Deferral of gain on like-kind exchange no no

Exception from net operating loss

limitations for corporations in bankruptcy

proceedings

no no

Deferral of gains from sale of broadcasting

facilities to minority-owned businesses

no no

Deferral of tax on capital construction

funds of shipping companies

no no

Regional economic development tax

incentives: empowerment zones,

enterprise communities, and Indian

investment incentives

certain credits may

be limited

certain expensing

provisions may be

limited

Deductibility of charitable contributions certain contributions

until 1993

no

Employee stock option plan rules no no

Targeted jobs credit yes no

Possessions tax credit no no

Note: This list of corporate tax expenditures follows Joint Committee on Taxation definitions for tax

expenditures with more than $100 million in estimated revenue loss for 1995.

Source: GAO.

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Has AMT Ensured

That Corporations

With Positive Book

Income in a Given

Year Paid Some Tax in

That Year?

AMT has generated tax from some firms with positive book income that

otherwise would not have paid regular tax, but the percentage of firms

with book income that paid tax in a given year was not changed very much

by AMT. The data indicate that AMT has been successful in ensuring that

large firms with book income paid some tax in that year. The corporations

with book income that did not pay AMT or regular tax were generally small,

and most had net income under $40,000, the AMT exemption amount. The

large corporations that had book income but paid no tax were

predominately mutual funds and investment companies, which generally

pass all income to shareholders. Because of this feature of their business,

these companies are exempt from the book income and ACE adjustments.6

Differences Between

Taxable Income and

Financial Statement

Income

The measurement of income for financial statement purposes and

measurement for tax purposes differ in important ways. These differences

make it possible for the same corporation to report positive income for

financial statement purposes (book income) and a loss for tax purposes,

or the opposite.

Some items of revenue and expense enter into the calculation of either

taxable income or book income without ever affecting the other under

current provisions of the tax laws. One example of a permanent difference

between the two income measures is the treatment of income from

tax-exempt securities. Corporations will include income from tax-exempt

securities on their financial statements, but this income will never be

included in taxable income. Another permanent difference is the treatment

of dividends received by a corporation. For financial statements, dividends

received are included in income. For tax purposes, only a fraction of

dividends received are taxed. The purpose of the deduction for dividends

received is to compensate in part for the lack of a deduction for dividends

paid. Without a deduction for dividends received, income flowing through

several corporations and ultimately to shareholders would be taxed at all

levels.

Some items of revenue and expense are eventually recognized by both tax

and financial accounting but are recognized at different times. Book

income before tax can exceed taxable income if (1) revenue is recognized

for accounting purposes prior to its recognition on the tax return, or

(2) expenses are recognized for accounting purposes after their deduction

on the tax return. On the other hand, book income before tax can be less

than taxable income if (1) revenue is recognized for accounting purposes

6

Internal Revenue Code sections 56(g)(6) and 56(f)(4).

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after its inclusion on the tax return, or (2) expenses are recognized for

accounting purposes prior to their deduction for tax purposes. In contrast

to permanent differences, timing differences affect the timing of the

recognition of income or expense; over time, the same amount of income

and expense will be recognized for both book and tax purposes.

How Different Are Tax and

Book Income?

To show how book income and taxable income are related, we calculated

the percentage of corporations in each of the classes in table III.4. The first

row shows the percentage of corporations that reported a positive amount

of book income and a positive amount of net income on their tax returns

in a particular year. The middle two rows of the table show the percentage

of corporations that differ in the sign of the two income measures in the

year. The last row shows the percentage of corporations that reported

losses on both their financial statements and for tax purposes in the year.

Table III.4: Percentage of Corporations

in Net Income (Taxable Income Before

Loss and Dividend Deduction) and

Book Income Categories

1987 1988 1989 1990 1991 1992

Positive net income,

positive book income

50.8 48.4 47.6 46.2 45.4 46.1

Positive net income, 

zero or negative book

income

6.4 7.0 6.9 6.9 6.6 7.8

No net income,

positive book income

1.3 1.5 1.4 1.4 1.6 1.4

No net income, 

zero or negative book

income

41.5 43.1 44.1 45.5 46.4 44.7

Source: GAO calculations based on IRS Statistics of Income data.

Table III.5 repeats this calculation after allowing for the deduction of

dividends received and net operating losses from net income. The table

shows that these two provisions have significant effects. In 1992,

13 percent of taxpayers with positive book income and positive current

year net income reduced their current year taxable income to zero by

using deductions for dividends received and prior year losses.

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Table III.5: Percentage of Corporations

in Regular Taxable Income and Book

Income Classes

1987 1988 1989 1990 1991 1992

Positive regular taxable

income, positive book

income

40.4 37.5 36.5 34.6 33.4 33.1

Positive regular taxable

income, no book income

4.9 4.9 4.9 4.9 4.7 5.4

No regular taxable

income, positive book 

income

11.7 12.4 12.5 13.1 13.6 14.4

No regular taxable

income, no book income

43.0 45.2 46.1 47.5 48.4 47.1

Source: GAO calculations based on IRS Statistics of Income data.

Regular tax owed on taxable income is further reduced by any allowable

credits. Table III.6 shows the percentage of corporations that have positive

and zero regular tax liability while reporting positive or negative book

income.7

Table III.6: Percentage of Corporations

With Regular Tax Payment, by Book

Income Status

1987 1988 1989 1990 1991 1992

Positive regular tax, 

positive book income

37.1 35.7 35.2 33.6 32.6 32.4

Positive regular tax, 

negative book income

4.5 4.7 4.8 4.7 4.5 5.1

Zero regular tax,

positive book income

15.0 14.2 13.8 14.0 14.4 15.2

Zero regular tax,

negative book income

43.4 45.4 46.3 47.7 48.5 47.3

Source: GAO calculations based on IRS Statistics of Income data.

As one goal of AMT is to get taxpayers with positive book income in a given

year to pay tax in that year, its design must “undo” many of the differences

between regular tax income and book income. Many of the preference

items and the adjustments serve this purpose, as do the book income and

ACE adjustments.

7

These figures will understate potential credit use in the absence of AMT. AMT limits the use of credits

both by AMT payers and by non-AMT payers whose potential credit use would reduce regular tax

below tentative AMT.

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Table III.7: Number of Corporations

Paying Some and No Regular Tax and

AMT, by Book Income Status, by Year

Numbers in thousands

1987 1988 1989 1990 1991 1992

Corporations with positive book income

No regular tax, no AMT 367 318 295 291 293 306

No regular tax, some AMT 6 9 10 10 9 10

Some regular tax, no AMT 912 811 763 702 670 661

Some regular tax, some AMT 9 13 12 17 16 14

Total 1,294 1,151 1,080 1,020 989 991

Corporations with negative book income

No regular tax, no AMT 1,077 1,046 1,018 1,017 1,018 984

No regular tax, some AMT 1 2 2 4 3 2

Some regular tax, no AMT 111 106 104 99 93 105

Some regular tax, some AMT 1 2 1 2 2 2

Total 1,190 1,156 1,125 1,122 1,116 1,093

Grand total 2,484 2,306 2,205 2,142 2,105 2,084

Note: Totals may not be the sum of the detailed numbers due to rounding.

Source: GAO calculations based on IRS Statistics of Income data.

Many AMT Payers Did Not

Owe Any Regular Tax

Table III.8 shows the percentage of AMT payers that also paid regular tax

and the percentage that reported no regular tax liability. The percentages,

which were consistent across time, show that about half of AMT payers

owed regular tax as well as AMT. However, a significant percentage of AMT

payers had no regular tax liability at the time they paid AMT.

Table III.8: Percentage of Corporations

Paying AMT by Regular Tax Status Regular tax status 1987 1988 1989 1990 1991 1992

Paid positive

regular tax

56 57 52 58 59 56

Paid no regular

tax

44 43 48 42 41 44

Source: GAO calculations based on IRS Statistics of Income data.

Table III.9 examines the relationship between regular tax status and AMT

payment in more detail. The table groups AMT taxpayers into four

categories. The first category includes those taxpayers that had positive

taxable income and paid some regular tax. The second category covers

those taxpayers with positive net income but no regular tax; these

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taxpayers had credits that could have eliminated all regular tax or

sufficient NOL deductions to eliminate all taxable income. The third

category is for those taxpayers with a current year regular tax loss. A small

number of AMT payers paid regular tax but did not fall into one of the other

categories.

The table shows that the majority of AMT payers had positive taxable

income and also owed regular tax. Fewer AMT payers had positive taxable

income and owed no regular tax. A large percentage of AMT payers owed

no regular tax due to net operating loss deduction carryforwards. A

smaller but significant percentage of AMT payers had a current year regular

tax loss but had positive AMTI leading to an AMT liability.

Table III.9: Percentage of AMT Payers

by Regular Tax Status and Net Income

Status

1987 1988 1989 1990 1991 1992

Positive regular tax, 

positive net income

56 57 52 58 59 56

Zero regular tax, 

positive net income

30 29 31 27 27 33

Zero regular tax, 

negative net income

14 14 17 15 14 11

Positive regular tax, 

negative net income

0 0 1 1 1 1

Source: GAO calculations based on IRS Statistics of Income data.

Table III.10 shows the share of AMT liability that is raised from each of the

groups shown in table III.9.

Table III.10: Percentage of AMT

Liability by Regular Tax Status and Net

Income Status

1987 1988 1989 1990 1991 1992

Positive regular tax, 

positive net income

54 46 55 68 60 56

Zero regular tax, 

positive net income

28 35 31 18 25 34

Zero regular tax, 

negative net income

16 18 14 13 15 10

Positive regular tax, 

negative net income

1 0 0 0 0 0

Source: GAO calculations based on IRS Statistics of Income data.

Most AMT Payers Had

Positive Book Income

The legislative history of AMT indicates that Congress was concerned that

confidence in the tax system could be undermined if corporations that

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reported significant income on their books paid no tax. Table III.11 shows

that most AMT payers had positive book income, as might be expected

because of the large percentage of AMT returns that included the book

income and ACE adjustments. However, a significant percentage of AMT

payers had negative book income.

Table III.11: Percentage of AMT-Paying

Corporations by Book Income Status Book income status 1987 1988 1989 1990 1991 1992

Positive book 

income

88 86 87 82 83 85

Zero or negative 

book income

12 14 13 18 17 15

Source: GAO calculations based on IRS Statistics of Income data.

To determine whether AMT significantly reduced the number of taxpayers

that reported positive income and paid no tax, we calculated the

percentage of taxpayers with positive book income that paid AMT and had

no regular tax liability. Table II.12 shows the tax status of those

corporations that reported positive book income. Most taxpayers with

positive amounts of book income paid regular tax. AMT had a very small

effect on the overall percentage.

Table III.12: Percentage of Taxpayers

With Positive Book Income by Tax

Status

1987 1988 1989 1990 1991 1992

Paid regular tax only 70 70 71 69 68 67

Paid regular tax and AMT 1 1 1 2 2 1

Paid AMT only 0 1 1 1 1 1

Paid no tax 28 28 27 29 30 31

Source: GAO calculations based on IRS Statistics of Income data.

However, AMT raised a significant amount of revenue from firms that

reported book income and did not pay regular tax. Table III.13 shows the

percentage of total AMT liability paid by corporations according to their

regular tax and book income situation. Corporations with positive book

income and no regular tax liability paid a significant portion of AMT.

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Table III.13: Percentage of AMT

Liability by Regular Tax and Book

Income Status

AMT payers: regular tax

and book income status 1987 1988 1989 1990 1991 1992

Also paid regular tax, 

positive book income

54 45 52 56 52 45

Also paid regular tax, 

negative book income

2 2 3 13 8 11

Paid AMT only, 

positive book income

41 47 39 23 28 36

Paid AMT only, 

negative book income

4 6 6 8 12 8

Source: GAO calculations based on IRS Statistics of Income data.

Why Did Companies With

Positive Book Income Not

Pay AMT?

To determine why AMT had not forced all corporations with positive book

income to pay some tax, we analyzed the information that was available

for these corporations from their regular tax returns. The IRS database that

we used had little AMT information for non-AMT payers. In particular, small

taxpayers who qualify for the exemption are not required to file a Form

4626, so IRS does not have AMT information for these taxpayers. Without a

4626, we could not completely identify the reasons why firms would not be

paying AMT. However, we were able to characterize these firms by their

regular tax returns.

• About 98 percent of the corporations with positive book income and no

tax payment were relatively small, having less than $10 million in assets.

• About 85 percent had less than $40,000 in net income. Thus, it is likely that

they would qualify for the AMT exemption.

• Most firms with $1 billion or more in assets were regulated investment

companies (RIC) and real estate investment trusts (REIT), which are

technically subject to AMT but are exempt from the book income and ACE

adjustments. (See table III.14.)

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Table III.14: Characteristics of

Corporations With Positive Book

Income Paying No Regular Tax or AMT

1987 1988 1989 1990 1991 1992

Percentage of 

corporations with less 

than $40,000 in net 

income

85.9 84.9 85.3 86.3 86.5 86.7

Percentage of 

corporations with less 

than $10 million in 

assets

98.3 98.1 97.9 98.0 97.7 97.5

Percentage of 

corporations with 

$1 billion or more in

assets that are RICs or

REITs

85.6 96.6 96.7 97.2 96.3 97.8

Source: GAO calculations based on IRS Statistics of Income data.

Page 68 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix IV 

Has AMT Affected Corporate Investment?

Studies and comments by economists on the potential effect of AMT on

investment have considered two ways in which AMT might affect

investment. First, by increasing the average tax rate, AMT could reduce

cash flow, discouraging investment. Second, AMT could change the

marginal tax rate, which is the additional tax owed from an additional

dollar of income. If AMT changed the incentives to invest, this in turn could

lead to changes in investment. The material that follows summarizes the

results and ideas of the various studies and comments.

Effects of AMT on

Cash Flow and

Investment

Corporations can finance investment through internal funds (retained

earnings or profits) or external funds, such as debt or new stock issues. If

a corporation must pay significantly higher costs for borrowed funds or

newly issued stock than the opportunity cost of retained earnings,

investment could be sensitive to the current profitability or cash-flow

position of the firm.1

 In circumstances where securities markets do not

have the same information as managers in evaluating the potential

investments of the firm, firms that must borrow from the markets may

have to pay a premium for funds. If such premiums had to be paid,

potential investments that could be profitable if the firm had sufficient

cash flow might not be profitable, and investment could be curtailed or

delayed until sufficient cash flow was available.

A number of recent studies have found significant effects of cash flow on

investment, and some authors have concluded that some corporations find

external funds significantly more expensive than internal funds. These

studies have concluded that this is more likely to be the case for smaller

firms, firms that pay relatively small amounts of dividends, firms without

access to the corporate bond market, and firms that cannot use working

capital to smooth investment spending over time.2

It is not clear how many AMT payers meet these conditions. No study has

directly tested the extent to which such cash-flow constraints affect

1

Opportunity cost in this circumstance is the amount that could be earned in the most profitable

alternative investment. For example, the corporation could invest its retained earnings in government

bonds and earn a relatively safe return.

2

Recent studies include R. Glenn Hubbard, Anil K. Kashyap, and Toni M. Whited, Internal Finance and

Firm Investment, National Bureau of Economic Research Working Paper 4392, June 1993; Toni M.

Whited, “Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data,” The

Journal of Finance, XLVII:4 (1992); Stephen D. Oliner and Glenn D. Rudebusch, “Sources of the

Financing Hierarchy for Business Investment,” The Review of Economics and Statistics, 1992; Steven

M. Fazzari and Bruce C. Petersen, “Working Capital and Fixed Investment: New Evidence on Financing

Constraints,” Rand Journal of Economics, 24:3 (Autumn 1993); and Steven D. Oliver and Glenn D.

Rudebusch, Is There a Broad Credit Channel for Monetary Policy?, Board of Governors of the Federal

Reserve System Working Paper 146, January 1994.

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corporations that paid AMT.

3

 The tax return data we used were limited in

their ability to directly test many of these factors. However, the data did

show that most AMT is paid by relatively large corporations. To the extent

that investment by large corporations is less dependent on current cash

flow than is the case for small corporations, the effect of the AMT on

investment would be limited. In addition, as AMT credits are reclaimed in

the future, cash flow would increase at that time, possibly increasing

investment.

Taxes Affect

Investment Incentives

Several studies have analyzed the effects of AMT on incentives to invest.

These studies have attempted to measure the extent to which AMT changes

incentives to invest. While AMT increases the average tax rate paid by

corporations, it may increase or decrease the marginal tax rate on new

investment.

A common approach to analyzing the effects of taxes on investment has

been to calculate the extent that taxes increase the before-tax profit rate

or pretax rate of return needed to generate a given after-tax profit or

return on investment. Under these analyses, business income taxes have

been found to effectively raise the price of investments. If investments

cost more than they otherwise would, only those that earn relatively high

profits over time will be worthwhile. One advantage to this type of analysis

is that it can include all the features of the tax code that may affect the

after-tax return to an investment.

Researchers have studied how several business income tax provisions may

affect incentives to invest. In particular, the incentives to invest can be

affected through the tax rate, depreciation provisions, the deductibility or

nondeductibility of interest payments and dividends, whether inflation is

accounted for, loss provisions, and credits for certain types of investment.

First, the lower the statutory business tax rate is, the lower is the cost of

capital investments, and the greater is the incentive to invest. Second, the

more accelerated the depreciation method and shorter the useful lives of

business assets are, the lower is the cost of investment. For example, an

immediate deduction of all investment spending (expensing) reduces the

tax cost on investment to zero. Third, inflation can reduce the value of

deductions that are based on historical cost. Indexing provisions would

3

Prakken discussed the potential effects of AMT on investment via cash flow. He concluded that AMT

is more likely to have a significant effect on investment through its effect on the cost of capital. See

Joel L. Prakken, “Investment, Economic Growth and the Corporate Alternative Minimum Tax,” in Tax

Policy for Economic Growth in the 1990s, American Council for Capital Formation Center for Policy

Research.

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lower the cost of capital in times of inflation. Fourth, the deductibility or

nondeductibility of sources of finance and the tax rates that apply to those

sources in the individual income tax can affect the cost of investment.

Fifth, the deductibility of prior-year losses from taxable income and

whether such loss carryforwards earn interest to preserve their present

value can affect the cost of capital. Finally, if tax credits are allowed for

certain types of investment, the cost of those investments falls.

As shown in table IV.1, relative to the regular tax, AMT has a lower rate, a

generally slower depreciation schedule, and additional limitations on

credits and losses. Since the lower tax rate by itself would lower the cost

of investment but the other two features would raise the cost of

investment, it is not immediately clear whether the cost of investment

would rise or fall. An evaluation of the effects of AMT must include all these

features.

Table IV.1: Major Tax Code Features

Affecting Investment in Regular Tax

and AMT

Item Regular tax AMT

Tax rate 35 percent 20 percent

Depreciation schedule Accelerated relative to

economic depreciation

(with low to moderate

inflation)

Slower method than regular

tax depreciation, longer

useful lives

Use of credits Several credits can be 

used to reduce tax, subject

to limits

Most credits cannot be used

Treatment of losses Carryforward can reduce

taxable income to zero

Can reduce AMTI by at

most 90 percent

Source: Internal Revenue Code.

Studies of AMT and

Incentives to Invest

The studies we reviewed found that relative to the regular tax, investment

incentives can be increased or reduced by AMT, depending on several

factors. In general, these studies focused on investment incentives for

small projects that would not by themselves affect whether the

corporation would be subject to the regular tax or AMT.

For firms permanently paying AMT, the incentives to invest were found to

be greater under AMT than the regular tax for investments financed by

equity. In this case, the value of the lower tax rate more than offset slower

depreciation deductions, so the effective tax rate was lower.

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On the other hand, investment incentives can be lower under AMT relative

to the regular tax for debt-financed investments.4

 Since interest is

deductible under both AMT and the regular tax, the higher rate under the

regular tax is a relative advantage because a dollar of interest payments

will reduce taxes by a greater amount if the tax rate is higher. Since the

regular tax code favors debt-financed over equity-financed investment at

the corporate level because interest payments are deductible and

dividends are not, AMT may reduce this distortion.

For investments financed with a mixture of debt and equity, the effective

rate under AMT can be higher or lower depending on the amount of debt

used. For an investment with the average mix of approximately one-third

debt, effective rates are higher under the regular tax than under AMT.

5

The results cited above hold for firms that are either permanently paying

only the regular tax or paying AMT. However, the effect of AMT on

investment incentives is further complicated if firms switch back and forth

from AMT status to regular tax status. In this case, the cost of capital will

depend on the timing of investment relative to the time during which AMT

is paid and the length of time the firm pays AMT and recovers its credits, as

well as the source of financing for the investment. Investment incentives

will depend on the timing of investment because of the differences in the

depreciation rules and the tax rates between the two systems. If

depreciation deductions are taken when the firm is paying the regular tax,

and income from the investment is received when the firm is paying AMT,

the cost of investment is relatively low. If depreciation deductions are

taken when the firm is paying AMT and income is taxed at the higher

regular tax rate, the cost of investment is higher.6

A recent study also showed that AMT may change the incentives to invest in

the United States or abroad. Since the AMT tax rate is lower than the

regular tax rate, firms operating abroad may find that AMT status presents

an opportunity to bring profits back to the United States and pay tax at a

4

Prakken computed changes in the cost of capital from AMT using a leverage ratio of 62 percent as a

base case. He also showed how changes in the cost of capital are dependent on the amount of debt

used in financing investment. See Joel Prakken, “Investment, Economic Growth and the Corporate

Alternative Minimum Tax.”

5

A mix of one-third debt was described as typical by Gravelle and by Bernheim. See Jane G. Gravelle,

The Economic Effects of Taxing Capital Income (Cambridge, MA: The MIT Press, 1994), chapter 7; and

B. Douglas Bernheim, “Incentive Effects of the Corporate Alternative Minimum Tax,” in Lawrence H.

Summers, ed., Tax Policy and the Economy, National Bureau of Economic Research (Cambridge, MA:

The MIT Press, 1989).

6

Andrew Lyon, “Investment Incentives Under the Alternative Minimum Tax,” National Tax Journal,

XLIII:4 (1990), pp. 451 –65. The article is also summarized in Gravelle (1994), pp. 170-71.

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temporarily lower tax rate. If these additional profits are reinvested here,

domestic investment may rise. On the other hand, the depreciation

schedule under AMT is closer to that for foreign investment under the

regular tax, narrowing the differential that exists under the regular tax.

AMT may thus reduce the relative disincentive to invest abroad,

encouraging more investment abroad than otherwise.7

The literature does not cover the effect of AMT on investment when an

investment is large enough to potentially change the tax status of the firm

from the regular tax to AMT or from a current net operating loss position to

AMT. Some studies have examined investment incentives when

corporations can be either in a net operating loss carryforward position or

paying the regular tax. In this case, the size of net operating loss

outstanding has an effect on incentives; a firm with a relatively small NOL

carryforward is penalized for investment because of the loss of the time

value of money on the loss. However, a large NOL carryforward could

indicate that the firm will effectively be tax-exempt for the foreseeable

future and investment may be encouraged. It is not clear at this time how

AMT might change these incentives.8

How Sensitive Is

Investment to the Price or

Cost of Capital?

The effect of AMT on investment is further complicated by the lack of

consensus on the size of the effect on investment of changes in the

incentive to invest. Analysts have widely differing views on how

responsive investment is to changes in tax rules. Some studies have

concluded that investment is very responsive to changes in tax incentives,

while others have found small effects. The difficulty stems from a lack of

consensus on the nontax determinants of investment; without a clear

model of the other determinants of investment, it is difficult to isolate the

effects of taxes, holding other factors fixed.

In particular, it has been difficult for investment models to isolate the

effects of output and price. If output is the major determinant of

investment as firms add capacity when output is growing, then investment

may be relatively insensitive to the price of capital goods. If investment is

7

Andrew Lyon and Gerald Silverstein, The Alternative Minimum Tax and the Behavior of Multinational

Corporations, National Bureau of Economic Research Working Paper 4783, June 1994.

8

See Rosanne Altshuler, “Asymmetric Taxation and Investment Incentives,” Proceedings of the Annual

Conference of the National Tax Association, 1988, and Alan J. Auerbach, “The Dynamic Effects of Tax

Law Asymmetries,” Review of Economic Studies, LIII (1986).

Page 73 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix IV 

Has AMT Affected Corporate Investment?

sensitive to the price of capital goods, then taxes, including AMT, may have

an important effect on investment by changing the effective price.9

9

For a survey of recent literature on investment, see Robert S. Chirinko, “Business Fixed Investment

Spending: Modeling Strategies, Empirical Results, and Policy Implications,” Journal of Economic

Literature, XXXI (1993), pp. 1875-1911. Chirinko concluded that the effect of prices on investment is

small. For an opposite view, see Martin Feldstein and Joosung Jun, “The Effects of Tax Rules on

Nonresidential Fixed Investment: Some Preliminary Evidence from the 1980s,” in Martin Feldstein, ed.,

The Effects of Taxation on Capital Accumulation (University of Chicago Press, 1987).

Page 74 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
Appendix V 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Jose R. Oyola, Assistant Director, Tax Policy

 and Administration Issues

Lawrence M. Korb, Assignment Manager

Edward J. Nannenhorn, Economist-in-Charge

Patricia H. McGuire, Senior Computer Specialist

(268603) Page 75 GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax
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GAO/GGD-95-88 Experience With the Corporate Alternative Minimum Tax