Just as several states have individual alternative minimum taxes (AMTs) that prevent households and pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es from claiming “too many” itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. s, some states levy corporate AMTs to prevent corporations from reducing their corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. liability beyond a certain level. By requiring taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers to calculate their tax liability under two different systems, the federal AMT imposed steep compliance costs on businesses, which in some cases proved larger than collections.
Five states currently collect corporate AMTs: California, Iowa, Kentucky, Minnesota, and New Hampshire. This is a significant drop from the eight states that levied AMTs in tax year 2017.
The 2017 Tax Cuts and Jobs Act (TCJA) changed the landscape of corporate AMTs by repealing the federal corporate AMT, which was established in 1969. Most state corporate AMTs conformed closely to the federal AMT, but the TCJA left those states with no starting point to determine state AMT liability. As a result, the states that conformed closely to the federal provision dropped their corporate AMTs altogether in 2018.
Historically, Alaska determined state corporate AMT liability by collecting an amount equal to 18 percent of each business’s federal AMT liability. Without a federal corporate AMT, however, the state cannot “piggyback” on the federal provision, meaning no state corporate AMT can be collected. Similarly, Florida conformed to the post-TCJA Internal Revenue Code (IRC) in March 2018, and since only those companies that pay the federal AMT are liable for the Florida AMT, the state AMT is no longer collected. Finally, Maine repealed its corporate AMT in September 2018 as part of an IRC conformity bill, and Iowa, in a comprehensive tax reform package adopted in May 2018, is scheduled to repeal its corporate AMT as early as tax year 2021.
In addition to Iowa, California, Kentucky, Minnesota, and New Hampshire have corporate AMTs that do not conform to the federal provision and continue to collect them.
The corporate AMT is an inefficient means of ensuring taxpayers pay a minimum level of taxes each year, a factor which contributed to its repeal in several states and on the federal level. States that have not yet repealed their AMTs ought to consider whether the relatively small amount of additional revenue they gain from corporate AMTs is worth the added complexity of maintaining two parallel tax systems, and whether one streamlined corporate tax code with fewer deductions is a more efficient means of meeting annual revenue targets.
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