Alternative Minimum Tax (AMT): How It Works in 2025 and When Small Business Owners Get Hit

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The Alternative Minimum Tax (AMT) under IRC 55 is a parallel tax calculation that runs alongside the regular tax computation. You pay whichever is higher. The AMT starts with regular taxable income, adds back certain “preference items” and “adjustments” (like state and local tax deductions, incentive stock option bargain elements, and certain depreciation differences), subtracts the AMT exemption amount, and applies a flat 26%/28% rate. The TCJA dramatically reduced the number of taxpayers subject to AMT by raising the exemption to $88,100 (single) / $137,000 (MFJ) for 2025 and increasing the phase-out thresholds. Before the TCJA, approximately 5 million taxpayers paid AMT annually; after the TCJA, that number dropped to approximately 200,000. However, certain business owners, particularly those who exercise incentive stock options (ISOs), can still face significant AMT exposure.

✓Key takeaway

2025 AMT numbers:

Factor	Single	Married Filing Jointly
AMT exemption	$88,100	$137,000
Phase-out starts	$626,350	$1,252,700
Phase-out rate	25% of AMTI above phase-out start	25%
AMT rate (first $248,300 of AMTI above exemption)	26%	26%
AMT rate (above $248,300 of AMTI above exemption)	28%	28%

Common AMT preference items and adjustments:

Item	Regular Tax Treatment	AMT Treatment
State and local tax deduction (SALT)	Deductible (up to $40K/$80K cap)	NOT deductible (add back to AMTI)
Incentive stock option (ISO) exercise	No income recognized at exercise	Bargain element added to AMTI
Private activity bond interest	Tax-exempt	Taxable for AMT
MACRS depreciation (pre-TCJA property)	Accelerated rates	Slower ADS rates
Standard deduction	Deductible	NOT deductible (add back)
Net operating loss (NOL)	80% of taxable income	Limited to 90% of AMTI
Medical expenses (above 7.5% AGI)	Deductible	Deductible (same threshold since TCJA)
Home equity loan interest (non-acquisition)	Not deductible (TCJA)	Not deductible

Who still gets hit by AMT after the TCJA:

Scenario	AMT Risk
Exercised large incentive stock options	High
High income in a high-tax state (CA, NY, NJ)	Medium
Significant private activity bond holdings	Medium
Very high income ($500K+) with specific deduction patterns	Low-Medium
Average business owner without ISOs	Low

How does the AMT calculation work?

Hypothetical example

Round numbers. A married couple filing jointly. Husband works at a tech startup and exercised ISOs during the year.

Regular tax calculation:

Item	Amount
Husband’s W-2 salary	$200,000
Wife’s S-Corp K-1 income	$150,000
Total income	$350,000
Standard deduction	($30,000)
Taxable income	$320,000
Regular federal tax	$61,814

AMT calculation (without ISO exercise):

Item	Amount
Taxable income	$320,000
Add back: Standard deduction	$30,000
Alternative Minimum Taxable Income (AMTI)	$350,000
Less: AMT exemption (MFJ)	($137,000)
AMT base	$213,000
AMT (26% x $213,000)	$55,380
Regular tax	$61,814
AMT owed	$0 (regular tax is higher)

Without the ISO exercise, the couple owes no AMT because their regular tax ($61,814) exceeds the tentative AMT ($55,380).

AMT calculation WITH ISO exercise: The husband exercised 5,000 ISOs with a strike price of $20 and a fair market value of $80 at exercise.

Item	Amount
ISO bargain element	5,000 shares x ($80 - $20) = $300,000
Regular tax income from ISO exercise	$0 (no income recognized for regular tax)
AMT income from ISO exercise	$300,000 (bargain element is an AMT preference)

Item	Amount
Taxable income (regular)	$320,000
Add back: Standard deduction	$30,000
Add back: ISO bargain element	$300,000
AMTI	$650,000
Less: AMT exemption (MFJ)	($137,000)
AMT base	$513,000
AMT: 26% x $248,300	$64,558
AMT: 28% x ($513,000 - $248,300)	$74,116
Tentative AMT	$138,674
Regular tax	$61,814
AMT owed	$76,860 ($138,674 - $61,814)

The ISO exercise creates $76,860 in additional tax, even though the husband received no cash from the exercise (he still holds the shares).

The AMT credit: The good news: AMT paid due to timing differences (like ISO exercises) generates an AMT credit (Form 8801) that can be used to reduce regular tax in future years. When the shares are eventually sold, the regular tax on the sale will be higher (because the basis for regular tax is $20/share vs. $80/share for AMT), and the AMT credit offsets that regular tax.

Year	Event	Regular Tax	AMT	Net
Year 1 (exercise)	Exercise 5,000 ISOs at $80 (strike $20)	$61,814	$138,674	Pay $138,674 total. AMT credit = $76,860
Year 3 (sell)	Sell 5,000 shares at $100	Regular gain: $100 - $20 = $80/share = $400,000. AMT gain: $100 - $80 = $20/share = $100,000	Regular tax much higher. Use AMT credit to offset.	AMT credit recovers previous AMT paid

Strategies to manage AMT from ISOs:

Strategy	Effect
Exercise and sell same year (disqualifying disposition)	No AMT (bargain element taxed as ordinary income for regular tax)
Spread exercises across multiple years	Keep each year’s bargain element below $137,000 to stay within exemption
Exercise in January (not December)	If share price drops, can sell before year-end to avoid AMT on phantom gain
Calculate AMT before exercising	Know the AMT cost before committing
Consider 83(b) election for restricted stock	Report income at grant, not at vesting; AMT not applicable

The “AMT trap” for ISO holders: If the husband exercises ISOs in December 2025 when the stock is at $80 and the stock drops to $30 by April 2026, he still owes $76,860 in AMT on phantom gain that no longer exists. This is the scenario that devastated many tech employees during the dot-com crash. The defense: exercise ISOs only when you can afford the AMT payment AND are willing to hold the stock, or plan a same-day sale (disqualifying disposition) to eliminate AMT exposure.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Alternative Minimum Tax (AMT): How It Works in 2025 and When Small Business Owners Get Hit." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-alternative-minimum-tax-amt-2025

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.