The alternative minimum tax (the AMT), is an alternative tax regime Congress originally enacted to prevent high income taxpayers from not paying any income tax at all. The AMT is calculated by first calculating regular, ordinary taxable income, and then adding to that tax base items excluded from the regular tax base to determine alternative minimum taxable income (AMTI). Then, after an exemption amount is applied, AMTI is subject to a flat tax–whichever tax is higher, the ordinary income tax, or the AMT, the taxpayer owes.
Most importantly to early stage startup companies is this–that the spread on the exercise of an incentive stock option is an AMT adjustment. Meaning, that even if the option was granted at FMV, so that there is no income on grant, nor ordinary income on exercise–there is potentially a dramatic AMT impact on exercise. Beware!