Earnings Management and the Corporate Alternative Minimum Tax

Abstract

This study tests whether firms affected by the U.S. corporate alternative minimum tax (AMT) enacted as part of the Tax Reform Act of 1986 (TRA 86) managed their 1986 and 1987 earnings to reduce their tax liabilities. One provision of TRA 86 required the inclusion of a variant of financial accounting income (AMT book) in the AMT income tax base for 1987 through 1989. The AMT created an incentive to shift income to 1986 from 1987 to avoid the 20% tax rate on alternative minimum taxable income (AMTI) and an effective marginal rate of 10% on AMT book exposure. On the