Penalty Taxes

Question 1

What is the other name for penalty taxes?

Answer 1

Exercise taxes.

Question 2

Is penalty tax included in the regular tax?

Answer 2

No, this is in addition to the regular tax.

Question 3

Why did congress enact accumulated earnings tax?

Answer 3

Because corporations may choose not to pay dividends to avoid double taxation and retain accumulated taxable income (ATI) for which there is no reasonable business need to retain the earnings for the future. this tax will prevent that.

Question 4

Why did congress enact personal holding company tax?

Answer 4

Because corporations may hold high investment and hold higher than usual investment income to take advantage of dividend received deduction.

Question 5

What is the percentage of penalty tax?

Answer 5

20% in addition.

Question 6

Can corporation be subject to penalty of 20% apply for both types?

Answer 6

No, only one applies. i.e. accumulated earnings tax does not apply to personal holding company.

Question 7

What is the formula for accumulated taxable income?

Answer 7

Taxable income
\+ Dividends received deduction
\+ NOL deduction
- Federal income taxes
- Excess charitable contribution
- Net capital loss
= Adjusted taxable income
- Dividends paid
- Accumulated earnings credit
= Accumulated taxable income
x Tax rate on dividend income (20%)
= Accumulated earnings tax

Question 8

What does accumulated earnings tax credit represent?

Answer 8

The amount of earnings that can be accumulated for reasonable business needs.

Question 9

How is the accumulated earnings credit determined?

Answer 9

Greater of;

• earnings needed for reasonable business needs or
• minimum credit of $250,000 ($150,000 for service corporations) less accumulated earnings and profits at the beginning of the year.

Question 10

How can accumulated earnings tax be avoided?

Answer 10

By paying dividends within 3 1/2 months after year end, or by paying a consent dividend.

Question 11

What is consent dividend?

Answer 11

Hypothetical dividends that are treated as if they were paid on the last day of the corporation’s taxable year.
Corporations records the dividend paid and shareholders receipts of the dividend. Then shareholders contribute the amount back as capital contribution.

Question 12

What is the impact of consent dividend on shareholders stock basis?

Answer 12

Increase by the amount of consent dividends included in their gross income.

Question 13

What are 2 criteria that triggers personal holding company tax?

Answer 13

1. More than 50% of the value of the outstanding stock must be owned directly or indirectly by 5 or fewer individuals at any time during the last half of the tax year.
2. A substantial portion (60% or more) of the corporate income must consist of income such as dividends, interest, rents, and royalties.

Question 14

Personal holding company tax: when an individual is considered own stock indirectly (constructive ownership)?

Answer 14

When it is owned by the individual’s family, which include the individual’s brother, sister, spouse, and lineal descendants and ancestors.

Question 15

Personal holding company tax: when an individual is considered not be the constructive owner of the stock?

Answer 15

When it is owned by nephews, cousins, uncles, aunts, and any of his/her spouse’s relatives.

Question 16

Personal holding company tax: when do individuals are considered to own constructive ownership?

Answer 16

When individual is a partner in a partnership or the beneficiary of an estate that is a shareholder.

Question 17

Personal holding company tax: formula?

Answer 17

Taxable income
Plus minus adjustments:
- Corporate income tax
- Excess charitable contributions
- net capital gain (after tax)
\+ dividends received deduction
\+ net operating loss carryover
= Adjusted taxable income
- Dividends paid or deemed paid
= Undistributed PHC income
x 20%
= PHC tax

Question 18

Personal holding company tax: how can this be avoided?

Answer 18

By paying dividends within 3 1/2 months after year end, a consent dividend, or a deficiency dividend.

Question 19

Personal holding company tax: what is deficiency dividend?

Answer 19

Dividend expressly declared to avoid the tax and is paid within 90 days of the finding of a deficiency due to the PHC tax.

Question 20

Accumulated earnings credit: which corporations can avoid this?

Answer 20

Those with undistributed earnings and profits less than $150,000

Question 21

Are accumulated earnings tax and personal holding company tax self-assessed?

Answer 21

No for AET. Assessed by IRS.

Yes for PHC by filing a separate schedule 1120-PH along with regular tax return.