NEW RELIEF FOR AMT CREDIT CARRYOVERS
Alan L. Olsen, CPA MBA (tax) Managing Partner at Greenstein, Rogoff, Olsen &
Co. outlines how new tax law will affect certain taxpayers with large AMT credits
 FREMONT, California, December 14, 2006 – If you are one of those individuals
that exercised incentive stock options (ISOs) and then suffered a subsequent drop
in stock price, there is a brand new law that just may bring you some tax relief.
Appropriately named the “Tax Relief and Health Care Act of 2006,” the law was passed
by Congress in the wee hours of December 9th and addresses Alternative Minimum Tax
(AMT) credits. This new law makes it somewhat easier (and faster) to use up large
AMT credits created by exercising ISOs on stock you hold.
If you really want the nitty-gritty, you can read the entire
347 page bill here
(see page 61). President Bush is expected to sign the bill soon.
What Does It Mean to Me?
For anyone with large AMT credits, it can often take years to fully recover them.
And, the credits may never be fully recovered if the stock price has dropped substantially
since exercise. Congress was concerned about employees who held ISO stock and were
burned by the AMT on paper profits during the 1990-2002 boom and bust years. So
they decided to accelerate the tax treatment—starting in 2007 and only for unused
AMT credits more than three years old (e.g., in 2007 it applies to unused credits
from 2003 and earlier). It doesn’t matter whether your stock price has tanked or
rocketed since your ISO exercise. Instead, what counts is if the spread at the time
of exercise was large enough to trigger the AMT and you have not used up the credit.
For each year from 2007 through 2012, you will be able to recover up to either 20%
of these credits or $5,000 (or the full amount, if less), whichever is higher.
For example: If you have $50,000 AMT credit (from a prior ISO exercise in 2003).
In 2007 you can now use $10,000 (20%) of it to offset your tax liability and then
20% of the remainder (or $5,000, or what's left) from each prior year through 2012.
You should beware that there are complicated phase-out rules that apply to higher
incomes that could cancel the benefits of this tax credit. For 2006 year-end planning,
these rules may lead you to accelerate income into 2006 (before this provision becomes
effective) to take advantage of it in 2007. These phase-out rules will reduce the
amount of your credit by 2% for each $2,500 by which the taxpayer’s Adjusted Gross
Income exceeds $150,000 on a joint return or $100,000 for a person filing single.
What Creates a Large AMT Credit?
When an ISO is exercised, the advantage for taxpayers on one hand is that they need
not add the amount of the bargain element (difference between exercise price and
market price) into their gross income for the taxable year in which the exercise
occurs. On the other hand, if the stock is substantially appreciated on exercise,
the price difference is includable in Alternative Minimum Taxable Income (AMTI)
as an adjustment.
As a result of AMT treatment, taxpayers can have two different adjusted cost bases,
which are used to compute capital gain or loss when the stocks are sold in the future.
Specifically, exercise price is considered the regular tax adjusted basis, while
market price on the exercise date is the basis for AMT purposes. Taxpayers that
realize AMT on the ISO exercise are allow a credit for future years to offset the
regular tax liability that will be realized on sale of the ISO stock. However, if
the stock price falls substantially from the FMV on date of exercise, the taxpayer
may never use the large AMT credit generated.
In Summary
This new law creates planning opportunities now as well as in the future, when you
intend to exercise ISOs and hold the stock for more than three years. The law itself
may be complicated, but you are certainly free to
contact us if you have questions
and want some expert advice.
About the Author
Alan L Olsen (CPA, MBA tax) is the Managing Partner at Greenstein, Rogoff, Olsen
& Co. and focuses on developing innovative strategies for business enterprises
and individuals. A specialist in income tax planning, he frequently lectures and
writes articles on tax issues for professional organizations and community groups.
Alan has over 21 years experience in advanced tax planning including international
tax, company reorganizations, multi-state taxation, financial statement preparation,
stock options, estates and trusts, and representation before tax authorities.
For more information on issues relating to the Alternative Minimum Tax, you can
read Alan’s article Avoiding the AMT Trap
on the GROCO website.
About Greenstein Rogoff Olsen & Co., LLP
Greenstein Rogoff Olsen & Co. are the CPAs for Silicon Valley's most successful
people. Consistently ranked as one of the top accounting firms in the San Francisco
Bay Area, Greenstein, Rogoff, Olsen & Co is a full service CPA firm providing
accounting, tax, financial, and strategic planning for the highly successful. In
business since 1964, GROCO has offices in Fremont, Palo Alto and San Francisco,
California. We provide consulting services
to high net-worth individuals and closely
held businesses and have special expertise in providing accounting services to the
leading Venture Capital partners in the Silicon Valley.
Our primary services include income tax planning,
income tax preparation, strategic
business consulting,
business valuations, bill paying, estate planning, estate administration,
trustee services, and financial statement preparation. Our clients have participated
in building companies like Google, Skype, America Online, Oracle, Sun Microsystems,
Compaq, Macromedia, Ebay, and Genentech. Access
www.groco.com
for more information.
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FOR IMMEDIATE RELEASE
Media Contact:
Dennis Wolfe
P: 510.797.8661
F: 510.797.1791
dwolfe@groco.com
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