Alternative Minimum Tax Net Operating Losses and Individual Taxpayers

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Unfortunately, in the current economic climate many individual taxpayer's have net operating losses (NOLs) on their individual income tax returns. Fortunately, Sec. 172(b) allows for the carrying back and/or forward of these losses to create refund claims or reduce taxable income in future years. Any determination of a NOL deduction should not overlook the fact that there is also an alternative minimum tax net operating loss (AMTNOL) deduction, under Sec.5G(a)(4), which reduces alternative minimum taxable income (AMTI).

As a rule, the AMTNOL is different than the regular NOL because the AMTNOL deduction 1) is limited to 90% of AMTI determined before the AMTNOL deduction and 2) takes into account the adjustments and preferences enumerated in Secs. 58 and 57. Therefore, it can not be assumed that the existence of a large NOL carryover will automatically mean refunds from prior taxable years or the elimination of taxable income and tax liability in future years. As a matter of course, any regular NOL computation mandates a separate determination of the AMTNOL.

COMPUTATION OF THE AMTNOL

The determination is a two-step process. First, the regular NOL must be computed under Sec. 172(c) and (d). Then the regular NOL is modified as required by Sec. 56(6)(2).

172(c) defines NOL as the excess of allowable deductions over gross income after modifications as specified in Sec. 172(d). For individual income taxpayers Sec. 172(d) generally requires three basic changes. First, the NOL must be reduced by losses from the sale or exchange of capital assets that exceed the gains from the sale or exchange of the capital assets. Second, no deduction is allowed for personal exemptions. Last, deductions that are not attributable to a taxpayer's trade or business are allowed only to the extent of the amount of the gross income not derived from such trade or business.

Sec. 56(d) sets forth the modifications to be made to determine the AMTNOL. For post 1986 loss years, these are the adjustments required under Secs. 56 and 58. The NOL must also be reduced by tax preference items under Sec. …