Alternative Minimum Tax (AMT)–What Is It?

The alternative minimum tax (the AMT), is an alternative tax regime Congress originally enacted to prevent high income taxpayers from not paying any income tax at all.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!

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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