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In recent years, the Alternative Minimum Tax (AMT) has become an increasingly difficult issue for all Americans, including many small business owners. In fact, in 2006, the IRS's National Taxpayer Advocate's report pointed to the AMT as the single most serious problem with the tax code.

Established by the Tax Reform Act of 1969, the AMT was originally intended to target just 155 high-income households that were eligible for so many tax benefits that they owed little or no income tax under the tax code of the time. Essentially, "the AMT requires certain tax payers to calculate their taxes twice and then pay whichever amount is higher," explains Bill Rys, Tax Counsel at the National Federation of Independent Business (NFIB). "The main problem with the AMT is that it was never adjusted for inflation, and now many middle-class taxpayers and small-business owners find themselves subject to the tax. It's estimated that the number of taxpayers affected by the AMT will increase from approximately 1.8 million in 2001 to more than 41 million by 2013."

Depending on your income, the AMT can disallow a number of deductions, referred to as "tax preference items" under the onerous tax, including long-term capital gains, accelerated depreciation, certain medical expenses, percentage depletion, certain tax-exempt income, certain credits, personal exemptions and even the standard deduction.

According to the Congressional Budget Office, if the tax code isn't changed by 2010 (when the current code is set to expire), one in five taxpayers will have AMT liability and nearly every married taxpayer with an income between $100,000 and $500,000 will owe the alternative tax.

Recently, the 110th Congress fired what may have been the first salvo in changing the tax code to take the sting out of AMT, introducing legislation that will increase the AMT exemption amount to $66,250 for joint filers and $44,350 for single filers, ensuring that no additional taxpayers are subject to the AMT in 2008 and sparing some 23 million taxpayers. However, because the patch only applies to the upcoming tax season, Congress will have to address the issue again next year.

So why isn't the correction permanent? While the general consensus is that the AMT is a problem that must be fixed, pay-go rules passed at the beginning of the 110th Congress, which govern mandatory spending and tax legislation, forced the issue of cost. These rules require Congress to offset all loses in revenue from tax cuts with corresponding increases in revenue from other sources. In this case, a full repeal of the AMT carried an estimated price tag of $950 billion.

"The cost of the one-year patch alone was $50 billion," Rys says. "While Congress started discussing the problem of the AMT early in 2007, pay-go rules and revenue concerns carried the issue into the final days of its 2007 session. The Senate agreed to pass the one-year patch without revenue raisers. In the House, however, the Majority tried to find revenue raisers to cover the $50 billion. In the end, Congress passed the bill without paying for the patch. NFIB supported this legislation to provide relief to many small-business owners without raising taxes on other taxpayers."

But a year-at-a-time patch is not a good long-term solution. It's problematic for taxpayers who don't know what the exemption will be each year, or if there will even be a patch. And, in 2007, the situation was complicated for taxpayers because Congress didn't pass the patch until the very end of December. With the tax filing season beginning January 15, it allowed little time for the IRS to prepare and created more complexity and uncertainty for all taxpayers, including small-business owners.

"Permanent relief is needed to ensure small-business owners don't slip through the cracks to face an exorbitant tax bill going forward. Small-business owners are already overburdened by the complex tax code," asserts Dan Danner, NFIB Executive Vice President. "The AMT forces millions of taxpayers to fill out a 12-line worksheet, read eight pages of instructions and complete a 55-line form to determine whether they must pay this unfair tax. Small-business owners should be spending their time growing their businesses and hiring employees, not wasting their time determining if they are required to pay a ridiculously unfair tax."

To learn more about the AMT, and to determine whether you're affected, check out the IRS's Alternative Minimum Tax Assistant.