A lot has been written about the (not quite so) final agreement to avert the fiscal cliff and extend existing income tax rates for most citizens of the United States. Lost in most of the media coverage, mainstream of otherwise, was a significant development regarding the Alternative Minimum Tax (AMT). Congress finally “permanently fixed” the AMT by upping the exemption amount and then indexing it for inflation. At least it is as permanent as anything done in Washington these days.
The most important feature of the AMT change is that it will end the ongoing joke of extending the AMT for 1 year each year-end. I say joke because the way the Federal Government budget (and accounting) rules worked, they only had to count the reduction in AMT revenue for the one year they extended the higher exemptions. They were able to assume that in future years AMT revenue would be back and this would make projections of budget deficits smaller.
Let’s compare this to a couple of accounting standards those of us in the corporate world have to deal with. The first is around accruals for vacation pay. The standard starts off simply enough with the concept that if your vacation plan results in people earning vacation in one year that will be paid (either in the form of time or dollars if the employee leaves the company) in the next year, then you have to accrue for the vacation earned as of the end of year 1. But the standard does not stop there. In this case if there is no plan or even if there is, but the company makes a practice of doing something different that results in payment for unused vacation , then the company has to accrue the “substantive” practice rather than whatever the policy says in writing. A second standard that has the same concept is accounting for pensions. In that standard, if you have a practice of giving increases in the pension benefit periodically, then the standard requires you recognize that “substantive” plan even if it is not part of the official written plan.
So, in the corporate world, if you have a practice of doing something you have to recognize the results of that recurring practice. In Washington that rule does not apply. There, you can ignore something everyone knows you are going to do as long as you haven’t actually put it into law. I guess we can’t call it a lie, but it certainly was misleading. At least from now on deficit projections will be closer to reality and isn’t that the first step in dealing with a problem – recognizing what the actual problem is.