Federal Taxation VII: More Corporate Taxation Flashcards
Accumulated Earnings Tax
20% penalty imposed on undistributed accumulated taxable income
Accumulated Earnings Tax Formula
Taxable income \+/- Adjustments: - corporate Income tax - excess charitable donations - net capital loss - net capital gain (after tax) \+ dividends received deduction \+ net operating/capital loss carryovers - Dividends paid/deemed paid - Accumulated earnings credit = Accumulated Taxable Income
Accumulated Earnings Credit
Greater of:
- Amount of current E&P needed for the “reasonable needs” of the business
- Flat $250K (or $150K for service corps) less the accumulated E&P at close of preceding year
Personal Holding Company (PHC) Tax
20% Penalty imposed on PHC
Penalty tax triggered by relatively high levels of investment income in a corporation. Operates by imposing penalty tax on undistributed income.
PHC Tax Formula
Taxable Income \+/- Adjustments: - corporate income tax - excess charitable contributions - net capital gain (after tax) \+ dividends received deduction \+ net operating loss carryover (not previous year) = Adjusted Taxable Income - Dividends paid/deemed paid = Undistributed PHC Income
PHC Income Test
Met if Passive Income > 60% of adjusted ordinary gross income (AOGI)
PHC Ownership Test
Met if > 50% of the value of the stock is owned directly or indirectly by < 5 individuals at any time during last half of year
Passive Income
- taxable dividends
- interest
sometimes
- rents/royalties
- personal service contracts.
Adjusted Ordinary Gross Income (AOGI)
Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent/royalty income
Indirect Ownership determined by stock attribution rules.
Define ownership to include stock held by an entity or family members (brother, sisters, spouse, ancestor, and lineal descendants)
Difference between adjustments for PHC and accumulated earnings taxes
In PHC there is no adjustment for net capital losses and the adjustment for net operating loss carryovers does not include an NOL from the previous year
Deficiency Dividend
Dividend expressly declared to avoid the PHC tax. Paid within 90 days of tax imposition.
Affiliated Group
exists when a corporation owns at least 80% of the voting power of another corporation AND holds shares representing at least 80% of its value.
This test must be met every day of the year.
Eligible affiliated corporations can elect to file consolidated return, which permits (3)
- the corporations to eliminate intercompany profits/losses
- allows profitable corporation to offset its income against losses of another corp
- permits net capital losses of one corp to offset capital gains of another
Controlled Group
- entitled to one $250K accumulated tax credit
- limited to taxable income in each of the first two brackets, as though the group were one corp
- receives only one Section 179 expense deduction and one AMT exemption
Controlled Group: Parent-Subsidiary
Focuses on Corporate Ownership
Exists if:
- stock possessing > 80% of voting power of all classes of stock entitled to vote OR > 80% of total value of shares of all classes of stock of each of the corps, except the common parent, is owned by one or more of the other corps
- the common parent owns stock possessing > 80% of the total combined voting power of all classes of stock entitled to vote OR > 80% of the total value of share of all classes of stock of at least one of the other corporations
Controlled Group: Brother-Sister
Focuses on individual ownership
Exists if:
2 or more corps are owned by 5 or fewer persons (individuals, estates, trusts)
- who have common ownership of > 50% of total combined voting powers of all classes of stock entitled to vote OR > 50% of total value of shares of all classes of stock of each corp
- who possess stock representing at least 80% of the total combined voting power of all classes of stock entitled to vote OR at least 80% of total value of shares of all classes of each corporation
AND
- the 80% test does not apply for determining brother-sister corps when determining corporate tax brackets, the accumulated earnings credit, and the minimum tax exemption
E&P: Additions to taxable income
made for exempt income or deductions that do not represent an economic outlay:
- Municipal interest/life insurance proceeds
- Dividends-received deduction
- Carryforwards
- Domestic production activities deduction
- Proceeds from corporate life insurance policy (less cash surrender value)
E&P: Expenditure that are not deductible but represent economic outlays
These expenditures reduce taxable income in computing E&P:
- Federal Income Tax (net of credits)
- Related party losses
- Penalties, fines, lobbying expenses, “key” life insurance, disallowed portion of meals and entertainment
E&P: Modifications to taxable income
Timing differences that can be positive or negative:
- Deferred portion of a gain from a current installment sale (added this year, reversed later)
- Amount of depreciation deducted in excess of straight-line (added this year, reversed later)
- Section 179 expense
- Net capital loss and the excess amount of charitable contributions
E&P: Distributions
Generally reduce E&P
- Cash Distributions
- Property Distributions reduce E&P by greater of value or adjusted basis les any liabilities assumed by s/h
- Appreciated Property Distribution - first increase E&P by amount of gain
- Distributions cannot create a deficit in E&P, but net operating losses can
E&P: Dividend Treatment
- Taxable as dividend income to extent of s/h pro-rata share of E&P
- Excess is tax-free to extent of s/h basis in stock (and reduceds basis)
- Remaining distribution is taxed as a capital gain
- Both current and accumulated E&P are used to determine whether a distribution is a dividend
Property Distributions
- Value of property distributed less any debt assumed by s/h is amount eligible for dividend treatment
- Distribution of appreciated property causes the corporation to recognize gains like a sale of the property
- If liability on the property exceeds FMV, the FMV is treated as being equal to the liability
- Amount distributed = FMV - liabilities on property
- Basis of property to the shareholder is FMV
Constructive Dividend
Payment to s/h that is regarded as a dividend, such as property distributions
