Legal & Compliance
Alternative Minimum Tax
A parallel tax system that limits certain deductions and preferences, potentially affecting the tax treatment of carried interest and fund distributions.
The Alternative Minimum Tax (AMT) is a supplemental income tax that applies when a taxpayer's regular tax liability falls below a certain threshold due to deductions and preferences. For venture capital participants, AMT can affect the treatment of incentive stock options, carried interest, and certain fund distributions, potentially accelerating tax obligations.
In Practice
The partner's early exercise of ISOs in a portfolio company triggered AMT liability of $800K, which she was able to recover as a credit in subsequent years when the regular tax exceeded the AMT.
Why It Matters
AMT planning is essential for GPs and founders alike. Failing to account for AMT exposure can lead to unexpected tax bills, particularly around ISO exercises and carry distributions.
VC Beast Take
The 2017 Tax Cuts and Jobs Act significantly raised AMT exemption thresholds, reducing its impact on many investors. But GPs with large carry distributions and founders exercising significant ISO positions should still model AMT carefully.
Related Concepts
Further Reading
Exercise or Wait? A Guide to Startup Stock Option Decisions
Should you exercise your stock options now or wait? The answer depends on taxes, risk tolerance, and your company's trajectory. Here's a framework for making the right call.
Startup Equity Compensation Explained: Stock Options, RSUs, and More
ISOs, NSOs, RSUs, restricted stock — startup equity comes in many flavors. Here's what each type actually means for your compensation, your taxes, and your financial future.
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