Category: Corporations; Accounting Periods & Methods
Subject: Alternative Minimum Tax
Title: Effect of Difference in Accounting Methods
IRC Sections: 56(g)(4)(B)
Filename: 1274.html
Date Produced: 09/95

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com

Taxpayer is a cash basis, C corporation. Taxpayer provides creditors with accounts receivable and accounts payable information. Perhaps the taxpayer even provides unaudited accrual basis financial statements for credit purposes.

Issue
Does the difference in accounting methods as between the tax return and the financial statements create any kind of adjustment or preference for AMT purposes?

Answer
No adjustment or preference is created.

Discussion
First, there is no explicit AMT adjustment or preference for this kind of method of accounting differential. Accordingly, if there were a required cash-versus-accrual adjustment, it could only come about by means of either the book income adjustment (for tax years beginning in 1987, 1988, or 1989) or through the adjusted current earnings (ACE) adjustment for tax years beginning in 1990 or later.

Historical Background
Under the book income adjustment (BIA) system, it seems fairly clear that if the taxpayer's applicable financial statement is accrual basis and taxable income is computed on the cash basis, an AMT adjustment could well result.

There is a provision under the BIA system [Pre-1990 RRA Section 56(f)(3)(B)(ii)] to elect to treat corporate earnings and profits as the applicable financial statement for AMT purposes if the corporation's only available financial statement is an unaudited statement used for credit or some other substantial nontax purpose. Since the determination of earnings and profits is made on the same overall method of accounting as taxable income (Reg. Section 1.312-6), this election is for some taxpayers a means to escape an AMT adjustment under the BIA system. The IRS sanctioned this methodology in at least one private ruling. See PLR 8828049.

It seems under old law, that an AMT adjustment could have been avoided in the instant case by making the election under old law Section 56(f)(3)(B)(ii).

Current AMT Rules
The ACE system replaced the BIA system for tax years beginning after 1990. Under the ACE system, there is an AMT adjustment equal to 75% of the difference between alternative minimum taxable income (AMTI) and ACE.

ACE is based on the computation of earnings and profits. As discussed above, earnings and profits are computed using the same overall method of accounting as that used in computing the taxpayer's regular taxable income. Accordingly, since both AMTI and ACE are determined using the same method of accounting, it would be impossible to create an ACE adjustment by virtue having a cash basis tax return and an accrual basis financial statement.

Moreover, with the exception of certain mandatory items, ACE adjustments are limited only to those differences between E&P and pre-ACE AMTI that are permanent in nature. If an item of income or expense will be taken into account either currently or at any time for purposes of both AMTI and ACE, no ACE adjustment is needed. IRC Section 56(g)(4)(B) and Reg. Section 1.56(g)-1(c)(4). Since cash-versus-accrual differences affect both AMT and ACE at some point and since cash-versus-accrual is not on the list of specific mandatory ACE adjustments, there can be no ACE adjustment for this kind of item.