penalty taxes Flashcards
Accumulated earnings tax
An accumulated earnings tax of 20% is imposed on undistributed accumulated taxable income.
consent dividends
Hypothetical dividends that are treated as if they were paid on the last day of the corporation’s taxable year. Since they are not actually distributed, shareholders increase their stock basis by the amount of consent dividends included in their gross income.
Accumulated Earnings tax credit
The accumulated earnings credit is the greater of two numbers related to earnings and profits.
- One number is the amount of the current earnings and profits needed for the “reasonable needs” of the business.
- The second number is a flat $250,000 ($150,000 for service (e.g., health, law, accounting, engineering) corporations) less the accumulated earnings and profits at the close of preceding year.
“Reasonable needs of a business”
A question of fact, but they have been found to include amounts necessary to finance business expansion (actual or planned), to provide working capital, or to retire liabilities. Reasonable needs, however, do not include amounts retained for unrealistic needs or for loans to shareholders.
PHC tax of 20%
only on corporations qualifying as personal holding companies.
Banks, insurance, and finance companies are exempt from the tax because their business purpose is to manage investments.
Income and ownership tests
- The income test is met if personal holding company income constitutes 60% of adjusted ordinary gross income (AOGI).
The ownership test is met if more than 50% of the value of the stock is owned directly or indirectly by five or fewer individuals at any time during the last half of the year.
Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent and royalty income.Adjusted Ordinary Gross Income
Gross income excluding capital and 1231 gains and reduced by expenses associated with the production of rent and royalty income.
