Sale of a business: Could alternative minimum tax apply?

Changes to the alternative minimum tax (AMT), set to take effect on January 1, 2024, could impact some business owners who sell their business in 2024 or beyond. AMT can apply to levy tax in some situations where tax calculated under the regular tax system is lower than that calculated under the AMT system. If you pay AMT, it can be used to offset tax arising under the regular tax system for the following seven years.

Under the regular tax system, only 50% of capital gains are included in income, and when calculating adjusted taxable income under the current AMT rules, 80% of a capital gain is included. Starting in 2024, 100% of capital gains will be included in adjusted taxable income.

For most taxpayers, AMT isn’t ultimately an extra tax, but rather, a tax prepayment. AMT prevents unusually low taxes in a year of high income by assessing a minimum amount of tax in that year, with the ability to use that tax as credit against ordinary tax in the following seven tax years.

If you are planning to sell your business in the near future, and expecting to realize a large capital gain, if possible, you might consider having the sale occur in 2023 rather than 2024 to reduce your AMT exposure. It also may be wise to make large donations, whether in cash or in-kind, by the end of 2023. This decision should be made in consultation with your tax advisor, who can help you estimate whether any AMT arising on a sale or donation after 2023 is recoverable as an offset against future regular tax, based on your expected income for the following 7 years.

Read the full report Alternative minimum tax: What’s changing for 2024? (PDF, 210 KB) Opens in a new window.