Chapter 5: Other Corporate Tax Levies

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Chapter 5Other Corporate Tax Levies
Chapter 5 Other Corporate Tax Levies
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OTHER CORPORATETAX LEVIES

• Alternative minimum tax (AMT)
• Personal holding company (PHC) tax
• Accumulated Earnings Tax (AET)

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Alternative Minimum Tax (AMT)

• AMT is an acceleration of a corps income taxes
• Small C corp exemption from AMT
• AMT formula
• Statutory exemption amount
• Minimum tax credit
• See Topic Review C5-2 for a summary of the AMT

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Small C Corp Exemption from AMT

• Initial year all corps exempt
• 2nd year exempt if first year gross receipts ?
  5M
• 3rd year exempt if avg. of yr1 and yr 2 gross
  receipts ? 7.5M
• Subsequent years exempt if avg. of prior 3 yrs
  gross receipts ? 7.5M

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AMT Formula(1 of 3)

• Taxable income before NOL
• Tax preference items
• /- Adjustments to taxable income other then
  ACE adjustment and AMT NOL deduction (see TR
  C5-1)
• Pre-adjustment AMTI
• See Topic Review 5-1 for a summary of AMT
  adjustments

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AMT Formula(2 of 3)

• Pre-adjustment AMTI
• /- 75 of difference between pre- adjustment
  AMTI and ACE
• - AMT NOL deduction
• AMTI
• - Statutory exemption
• Tax base

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AMT Formula(3 of 3)

• Tax base
• x 20 tax rate
• Tentative minimum tax before credits
• - AMT FTC
• Tentative minimum tax (TMT)
• - Regular income tax liability
• AMT due (if any)

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Statutory Exemption Amount

• 40,000
• Reduced by 25 x (AMTI - 150,000)
• Fully phased out when AMTI 310,000

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Minimum Tax Credit

• Corp may take a credit in future years for AMT
  paid in previous years if computed regular tax,
  minus all non-refundable credits, is larger than
  that years TMT

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Personal Holding Company (PHC)

• Prevents closely held C corps from sheltering
  passive income from higher individual tax rates
• Stock ownership test
• Passive income test
• PHC penalty tax is 15
• PHC tax rate equal to highest individual income
  tax rate on dividends

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Stock Ownership Test(1 of 2)

• Five or fewer s/hs who own
• ?50 of outstanding stock at any time during
  last 6 months of corps tax year

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Passive Income Test(1 of 2)

• ? 60 of corps AOGI for year is PHCI
• See Fig. C5-1 for AOGI calculation
• PHCI includes
• Dividends, interest, annuity proceeds, royalties,
  distributions from estate or trust, certain
  personal service contracts

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Passive Income Test(2 of 2)

• PHCI includes (continued)
• Rents, unless corp earnings are predominantly
  from rental income
• See Table C5-2 for tests to determine exclusions
  from PHCI

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PHC Penalty Tax(1 of 3)

• Calculate undistributed personal holding company
  income (UPHCI)
• See next slide for calculation of UPHCI
• Apply 15 rate to determine tax

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PHC Penalty Tax(3 of 3)

• Avoiding PHC status with
• Throwback dividends
• Consent dividends
• Dividend carryovers
• Liquidating dividends
• Deficiency dividends
• See Topic Review C5-3 for a summary of PHC tax

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Accumulated Earnings Tax(AET)

• Definition
• Evidence of tax avoidance
• Evidence of reasonable needs
• AET liability
• See Topic Review C5-4

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Definition of AET

• Penalty tax to compel corps to distribute profits
  not needed for conduct of its business
• Tax at highest individual tax rate on
  dividends(15)
• S/h must have tax-avoidance motive to avoid
  receipt of dividends
• Usually applies to closely held corps

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Evidence of Tax Avoidance

• Loans to shareholders
• Corporate funds spent for personal benefit of
  shareholders
• Loans to a brother/sister corp
• Investments unrelated to corps business
• Protection against unrealistic hazards

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Evidence of Reasonable Needs

• Expansion or replacement of facilities
• Acquisition of a business enterprise
• Debt retirement
• Working capital - Bardahl formula
• Loans to suppliers or customers
• Product liability losses
• Stock redemptions
• Business contingencies

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AET Liability(1 of 2)

• 15 of AE taxable income
• Issue usually raised one or more years after tax
  year in question.
• Once determined, liability cannot be reduced by
  deficiency dividend
• Dividends actually paid during tax year reduce
  AETI
• AEC available but subject to phaseout.

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End of Chapter 5
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