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Chapter 5: Other Corporate Tax Levies

Chapter 5: Other Corporate Tax Levies. Chapter 5: Other Corporate Tax Levies. OTHER CORPORATE TAX LEVIES. Alternative minimum tax (AMT) Personal holding company (PHC) tax Accumulated Earnings Tax (AET) . Alternative Minimum Tax (AMT). AMT is an acceleration of a corp’s income taxes

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Chapter 5: Other Corporate Tax Levies

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  1. Chapter 5:Other Corporate Tax Levies Chapter 5: Other Corporate Tax Levies

  2. OTHER CORPORATETAX LEVIES • Alternative minimum tax (AMT) • Personal holding company (PHC) tax • Accumulated Earnings Tax (AET)

  3. Alternative Minimum Tax (AMT) • AMT is an acceleration of a corp’s 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

  4. 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

  5. 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

  6. 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

  7. 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)

  8. Statutory Exemption Amount • $40,000 • Reduced by 25% x (AMTI - $150,000) • Fully phased out when AMTI ≥ $310,000

  9. 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 year’s TMT

  10. 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

  11. 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 corp’s tax year

  12. Stock Ownership Test(2 of 2) • §544 attribution rules apply • Similar to §318 attribution rules except: • Family attribution includes ALL ancestors and lineal descendents • Corp attribution for ALL shareholders • Attribution rules cannot be used to prevent a corp from being a PHC

  13. Passive Income Test(1 of 2) •  60% of corp’s 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

  14. 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

  15. 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

  16. PHC Penalty Tax (2 of 3) Taxable income + Positive adjustments DRD, NOL, charitable contrib. c/o, leased prop. net loss, excess rent exp. -Negative adjustments Accrued US/foreign inc. taxes, excess NOL w/o DRD, charitable contrib., after-tax cap. gain - Dividends-paid deduction = UPHCI

  17. 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

  18. Accumulated Earnings Tax(AET) • Definition • Evidence of tax avoidance • Evidence of reasonable needs • AET liability • See Topic Review C5-4

  19. 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

  20. Evidence of Tax Avoidance • Loans to shareholders • Corporate funds spent for personal benefit of shareholders • Loans to a brother/sister corp • Investments unrelated to corp’s business • Protection against unrealistic hazards

  21. 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

  22. 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.

  23. AET Liability(2 of 2) Taxable income + Positive adjustments DRD, NOL, charitable contrib. c/o, capital loss carryover -Negative adjustments Accrued US/foreign inc. taxes, excess net cap. loss, charitable contrib., after-tax cap. gain - Dividends-paid deduction - Accumulated earnings credit = Accumulated taxable income

  24. End of Chapter 5 Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’sKenneth W. Monfort College of Businessrichard.newmark@PhDuh.com

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