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Chapter 5:Other Corporate Tax

Levies

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OTHER CORPORATEOTHER CORPORATETAX LEVIESTAX LEVIES

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

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Alternative Minimum Tax Alternative Minimum Tax (AMT)(AMT)

AMT is an acceleration of a corp’s income taxes

Small C corp exemption from AMTAMT formulaStatutory exemption amountMinimum tax creditSee 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

$5M3rd year: exempt if avg. of yr1 and yr 2

gross receipts $7.5MSubsequent 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 andAMT NOL deduction (see TR C5-1)

= Pre-adjustment AMTI

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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 basex 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

$40,000Reduced 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 year’s TMT

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Personal Holding Company Personal Holding Company (PHC)(PHC)

Prevents closely held C corps from sheltering passive income from higher individual tax rates

Stock ownership testPassive income testPHC penalty tax of 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 corp’s tax year

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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

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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

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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 (2 of 3)

Taxable income+ Positive adjustments

DRD, NOL, charitable contrib. c/o, leased prop. net loss, excess rent exp.

- Negative adjustmentsAccrued US/foreign inc. taxes, excess NOL w/o DRD,

charitable contrib., after-tax cap. gain

- Dividends-paid deduction= UPHCI

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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 TaxAccumulated Earnings Tax(AET)(AET)

DefinitionEvidence of tax avoidanceEvidence of reasonable needsAET liabilitySee 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 shareholdersCorporate funds spent for personal benefit

of shareholdersLoans to a brother/sister corp Investments unrelated to corp’s businessProtection against unrealistic hazards

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Evidence of Reasonable Needs

Expansion or replacement of facilitiesAcquisition of a business enterpriseDebt retirementWorking capital - Bardahl formulaLoans to suppliers or customersProduct liability lossesStock redemptionsBusiness 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 dividendDividends actually paid during tax year reduce

AETIAEC available but subject to phaseout.

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AET Liability(2 of 2)

Taxable income+ Positive adjustments

DRD, NOL, charitable contrib. c/o, capital loss carryover

- Negative adjustmentsAccrued US/foreign inc. taxes, excess net cap. loss,

charitable contrib., after-tax cap. gain

- Dividends-paid deduction- Accumulated earnings credit= Accumulated taxable income

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Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s

Kenneth W. Monfort College of Businessrichard.newmark@PhDuh.com