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 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

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

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

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

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)

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

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

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 of 15% PHC tax rate equal to highest individual income tax rate on dividends

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

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

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

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

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

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

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

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

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

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

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

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.

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

End of Chapter 5 Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard.newmark@PhDuh.com