Penalty Taxes Flashcards
How can the accumulated earnings tax be avoided?
-By documenting business reasons for accumulating income or distributing income as dividends
What is the accumulated earnings tax?
- Tax of 20% imposed on undistributed accumulated taxable income
- Can be avoided by paying dividends, consent dividends, or dividends within 2 1/2 months of year end
How do you calculate accumulated taxable income?
-Adjusting taxable income to reflect retained economic income. Accumulated earnings credit available for “reasonable” accumulation of earnings
Subtract: 1) accrued income taxes 2) excess charitable contributions 3) net capital loss 4) net capital gain after tax
Add: 5) DRD 6) Any NOL or capital loss carryovers
How do you calculate the accumulated earnings credit?
-The greater of 1) current E&P needed for reasonable needs of business (doesn’t include for loans to shareholders) or 2) $250,000 less than the accumulated E&P at close of preceding year
Is there a maximum on the accumulated earnings credit?
-No as long as reasonable business needs support it
What is the Personal Holding Company tax? How can it be avoided?
- Tax triggered by high levels of investment income imposed on undistributed income
- Can be avoided by keeping investment income levels low or distributing income as dividends
Who does the PHC tax apply to?
- Personal Holding Companies
- Banks, insurance companies, and finance companies are exempt from this tax
What are the two tests for determining whether a company is a PHC?
1) Income test: Met if 60% of AOGI is PHC income
2) Ownership test: Met if more than 50% of value of stock owned directly or indirectly by 5 or fewer individuals at any time during last half of year
What are the five adjustments for calculating PHC income?
Subtract: 1) accrued income tax 2) excess charitable contributions 3) net capital gain after tax
Add: 4) DRD 5) carryforward for NOLs prior to the previous year
What is the PHC tax imposed on?
-Undistributed PHC income
How can a corporation reduce PHC income?
- Pro rate dividends (cannot be disproportionate)
- Dividends including during the year dividends, consent dividends, dividends paid within 2 1/2 months after year and deficiency dividends (paid within 90 days of tax imposition)
