Alternative Minimum Tax (AMT) for Business Owners: How It Works, Who Pays It, and Planning Strategies

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·6 min read

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

The alternative minimum tax catches business owners who benefit from provisions that reduce their regular tax below what Congress considers a fair minimum. Under IRC 55, the AMT is the excess of the tentative minimum tax over the regular tax. If your regular tax is $80,000 and your tentative minimum tax is $95,000, you owe $15,000 of AMT on top of your regular tax. After the Tax Cuts and Jobs Act raised the AMT exemption to $88,100 single and $137,000 MFJ (2025, indexed) and increased the phase-out thresholds to $626,350 single and $1,252,700 MFJ (2025), the AMT affects far fewer taxpayers than it did before 2018. But it hasn’t been eliminated, and business owners who exercise incentive stock options, live in high-tax states, or hold private activity bonds can still be caught. The AMT computation requires recalculating taxable income by adding back AMT preference items (IRC 57) and AMT adjustments (IRC 56), applying the AMT exemption (IRC 55(d)), and computing the tentative minimum tax at 26%/28% rates.

✓Key takeaway

AMT computation (2025):

Step	Single	MFJ
1. Regular taxable income	X	X
2. Add back AMT preferences and adjustments	+ preferences	+ preferences
3. = Alternative minimum taxable income (AMTI)
4. Subtract AMT exemption	($88,100)	($137,000)
5. Phase-out: exemption reduced by 25% of AMTI over threshold	$626,350	$1,252,700
6. Exemption fully phased out at	$978,750	$1,800,700
7. AMT rate: 26% on first $248,300 of excess	26%	26%
8. AMT rate: 28% on amounts over $248,300	28%	28%
9. Tentative minimum tax = tax from step 7-8
10. AMT = tentative minimum tax minus regular tax (if positive)

Most common AMT preference items and adjustments:

Item	Regular Tax	AMT Treatment
State and local tax (SALT) deduction	Deductible (up to $40K/$80K under OBBBA)	Not deductible for AMT
ISO exercise (bargain element)	Not taxed at exercise	Bargain element is AMT income
Private activity bond interest	Tax-exempt	Taxable for AMT
Depreciation (pre-TCJA property)	MACRS accelerated	Slower AMT depreciation (150% DB or straight-line for certain property)
Standard deduction	Deductible	Not allowed for AMT
Net operating loss deduction	Up to 80% of taxable income	Limited to 90% of AMTI (with modifications)
Incentive stock option (ISO) bargain element	Not taxed until sale	Included in AMTI at exercise

When does the AMT affect business owners?

Hypothetical example

Round numbers. A business owner exercises incentive stock options (ISOs) with a large bargain element.

Scenario: ISO exercise triggers AMT

Item	Amount
W-2 salary	$200,000
Business income (S-Corp, material participation)	$150,000
ISO exercise: 10,000 shares at $10 exercise price, FMV $50/share	Bargain element: $400,000
Regular taxable income	$350,000 (salary + business income)
AMT preference: ISO bargain element	+$400,000
Alternative minimum taxable income (AMTI)	$750,000

Regular tax calculation:

Item	Amount
Taxable income	$350,000
Regular tax (2025 rates, MFJ)	~$72,000

AMT calculation:

Item	Amount
AMTI	$750,000
AMT exemption ($137,000, but phased out)	$137,000 - 25% x ($750,000 - $1,252,700) = $137,000 (no phase-out, under threshold)
AMTI minus exemption	$613,000
AMT: 26% x $248,300 + 28% x ($613,000 - $248,300)	$64,558 + $102,116 = $166,674
Tentative minimum tax	$166,674
Regular tax	$72,000
AMT owed	$94,674

Total tax: $72,000 + $94,674 = $166,674

Without the ISO exercise, total tax would be ~$72,000. The ISO exercise added $94,674 in AMT.

Minimum tax credit (MTC) recovery: The $94,674 of AMT paid generates a minimum tax credit that can be used in future years.

Year	Regular Tax	Tentative Minimum Tax	AMT	MTC Used	MTC Carryforward
Year 1 (exercise)	$72,000	$166,674	$94,674	$0	$94,674
Year 2 (no ISO)	$72,000	$60,000	$0	$12,000	$82,674
Year 3 (sell ISO shares, regular tax spike)	$150,000	$80,000	$0	$70,000	$12,674
Year 4	$72,000	$60,000	$0	$12,000	$674

The MTC ensures that AMT paid on timing items (like ISO exercises) is eventually recovered.

ISO exercise planning to minimize AMT:

Strategy	Details
Exercise only enough ISOs to stay below AMT threshold	Calculate the bargain element that triggers AMT and exercise up to that amount
Spread exercises over multiple years	$100,000 bargain element per year x 4 years vs. $400,000 in one year
Exercise and sell in the same year (disqualifying disposition)	No AMT preference (bargain element taxed as ordinary income on the regular return)
Exercise in a year of large capital losses or NOLs	Losses offset the AMT preference

AMT-safe ISO exercise calculation:

Item	Amount
Regular taxable income (before ISO)	$350,000
AMT exemption (MFJ)	$137,000
AMT rate difference creates AMT when AMTI pushes tentative minimum tax above regular tax
Safe bargain element (approximate)	~$50,000-$80,000 before AMT kicks in

Post-TCJA: Who still pays AMT?

Situation	AMT Risk
ISO exercise with large bargain element	High
High SALT deduction state (CA, NY, NJ)	Moderate (SALT cap limits the AMT adjustment)
Private activity bond holder	Moderate
Large depreciation preferences (pre-TCJA assets)	Low (TCJA eliminated most depreciation AMT adjustments)
Standard taxpayer with no preferences	Very low
Taxpayer with income under $200K	Very low (AMT exemption covers most preferences)

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

How does the alternative minimum tax affect business owners?

The AMT is a parallel tax system that adds back certain deductions and preferences to your regular taxable income to compute alternative minimum taxable income (AMTI). Common AMT triggers for business owners include the exercise of incentive stock options (ISOs), accelerated depreciation timing differences, and large state and local tax deductions. The AMT exemption amount ($85,700 for single filers, $133,300 for married filing jointly in 2024) phases out at 25 cents per dollar of AMTI above $609,350 (single) or $1,218,700 (married filing jointly). You pay whichever is higher: your regular tax or the AMT amount (26% on the first $232,600 of AMTI above the exemption, 28% on the excess). AMT paid due to timing differences (like ISO exercises or depreciation) generates a minimum tax credit that can offset regular tax in future years when those items reverse.

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Cite this page

Yarik Yarosh, CPA. "Alternative Minimum Tax (AMT) for Business Owners: How It Works, Who Pays It, and Planning Strategies." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-alternative-minimum-tax-amt-business-owners-planning

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

Alternative Minimum Tax (AMT) for Business Owners: How It Works, Who Pays It, and Planning Strategies

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