Note: This explanation is not applicable to an “S” corporation.

The corporate alternative minimum tax (AMT) is a separate tax that is parallel to the regular corporate income tax. It is designed to make it harder for corporations to reduce their tax by using certain deductions and other tax benefits. It does this by applying the tax to a more comprehensive base than the regular income tax, and by limiting the extent to which net operating loss carryovers and tax credits can be used to reduce taxes.

Certain “small” corporations are exempt from the AMT. This exemption applies to corporations whose average annual gross receipts didn’t exceed $7.5 million for all three-year periods beginning after 1993 and ending before the current year. For the corporation’s first three-year period (or portion of a period), the limit is $5 million instead of $7.5 million.

Here’s how these rules work for a new corporation:

 In a corporation’s first tax year, it is automatically exempt from the AMT, regardless of the amount of its gross receipts. There are exceptions to this rule where the corporation is the successor of an earlier corporation or where its gross receipts must be aggregated with those of a related corporation.

 In the corporation’s second tax year, it will be exempt from the AMT if its gross receipts for its first year were $5 million or less. If the first year had less than 12 months, that year’s gross receipts must be annualized before the $5 million limit is applied.

 In the third year, the limit is $7.5 million. Thus, assuming that the corporation was exempt in its second year, it will remain exempt in its third year if its average gross receipts for years 1 and 2 were $7.5 million or less.

 For years after the third year, the limit is $7.5 million and it applies to the full three-year period. Thus, assuming that the corporation qualified for the exemption in its third year, it will qualify in its fourth year if its average gross receipts for the three preceding years are $7.5 million or less. The same rule applies in the fifth year and each succeeding year.

If the corporation ceases to qualify for the small corporation exemption, the AMT will apply starting in that year but it won’t be applied retroactively. The corporation will remain subject to the AMT for each succeeding year, even if its gross receipts dip below the $7.5 million limit.