Diagnosing the AMA
The alternative minimum assessment (AMA) was enacted as part of the 2002 Business Tax Reform Act. The AMA requires taxable corporations to pay the greater of their New Jersey corporation business tax (CBT) regular liability or the AMA. For corporations subject to the regular CBT, the AMA rates were reduced to zero for tax periods commencing after June 30, 2006. That change effectively sunset the AMA for most taxpayers.
However, the AMA did not sunset for corporate taxpayers that are protected from the imposition of a tax based on or measured by net income under P.L. 86-272. As such, the AMA is now only imposed on out-of-state corporations that limit their New Jersey activities to solicitation. Those taxpayers remain subject to the AMA, unless they waive their P.L. 86-272 protection and consent to be subject to the regular CBT.
Under the AMA, a corporation must choose to compute its AMA liability using either the gross profits or gross receipts method. Taxpayers were exempt from the AMA if their gross profits were less than $1 million or gross receipts were less than $2 million.
The maximum AMA liability for an individual corporation for a tax year is $5 million. For an affiliated group of corporations, the maximum AMA liability is $20 million.
For taxable periods beginning on or after January 1, 2002, if a taxpayer incurs an AMA liability in excess of the regular CBT liability, the excess may be carried over to subsequent years and used as a credit against the regular CBT liability. (The carryovers never expire.) All other CBT credits available to the taxpayer must be used before taking the AMA tax credit.
There are limitations on how much credit can be taken on any single return. The credit taken shall not reduce the taxpayer’s CBT liability for the year to less than the AMA. Further, the credit cannot reduce the corporation’s regular tax liability by more than 50 percent or below the minimum tax due. If a corporation with AMA carries forward credits it has liquidated, the carry-forward credits are lost. If a corporation with AMA carries forward credits it has merged into another corporation, the carry-forward credits are lost to the corporation that does not survive such reorganization.
If the $20 million AMA liability cap is claimed by an affiliated group, the group must name a “key corporation” to act as a clearinghouse for the group by filing CBT Form 401. A key corporation is a designated member of the group responsible for reporting and paying the AMA liability for all members. Only the designated key corporation is entitled to claim the carry-forward credit for AMA paid by it.
The improper selection of a key corporation can delay the benefit of the AMA credit or, in the event of a corporate liquidation or some reorganization, result in the loss of the credit carry-forward. Ideally, the key corporation should be the member of the affiliated group that will incur the largest regular CBT liability most quickly.
The New Jersey Division of Taxation will permit the designation of a key corporation for a taxable period to be changed by filing amended CBT returns. Both the affiliated corporation originally designated as the key corporation and the affiliate which is to become the designated key corporation must amend their separate CBT returns. The change of designation will shift liability for the AMA payment from the original key corporation to the key corporation designated on the amended return.
Changing the designated key corporation is not without cost. The original key corporation will be entitled to claim a refund of the group’s AMA liability it paid, but interest will only be paid if the refund is not paid within six months of the refund claim. The newly designated key corporation will be required to pay the group’s AMA liability with its amended return. This will almost certainly result in an understatement of tax on the amended return, and the Division will assess interest and a late payment penalty on the underpayment.