R4-M4 Computations and Credits

Question 1

what are estimated payment rules for C corporation?

Answer 1

• small corporation (less than $1M taxable income): lesser of
  + 100% of CY tax or
  + 100% of PY tax
  + cannot use the two option above if the corp owed no tax PY or PY less than 12 months. must use annualized income method instead
  + otherwise interest and penalties
• Large corporation ($1M or more taxable income of any of 3 preceding years):
  + must pay 100% of CY tax
• use annualized income method

Question 2

what is limitation of tax credits?

Answer 2

• The credit may not exceed “net income tax” (regular tax less nonrefundable tax credits) less 25% of net regular tax liability above $25k. Ex: tax $225k and credit $225k. tax: $225k-25k=200k*25% => disallowed $50k. Credit: $225k-50k = $175k (credit allowed)
• unused carry back 1 and forward 20 years

Question 3

what are rules of foreign tax credit?

Answer 3

• step 1: determine the qualified foreign income taxes paid
• step 2: compute the foreign tax credit limitation
• step 3: determine the lesser of step 1 or step 2
• unused carry back 1 year and forward 10 years
• choose annually to take either a credit or a deduction. if elects the benefit of foreign tax credit for any tax year, NO portion of the foreign taxes will be allowed as a deduction in that year or any subsequent year

Question 4

what are rules of accumulated earnings tax?

Answer 4

• a penalty tax imposed on regular C corporations whose accumulated RE are in excess of $250k if improperly retained instead of being distributed as dividends to (high tax bracket) shareholders.
• only paid when the IRS assesses the tax
• personal service corps are entitled to only $150k (lifetime)
• tax rate individuals pay on dividends income: 20%
• to avoid: “reasonable needs” or need to redeem the corp stock included in a deceased stockholder’s gross estate, or pay dividends by 4/15 Y2

Question 5

what are personal holding company and its rules?

Answer 5

• definition: corporations more than 50% owned by 5 or fewer individuals (direct or indirect 1/2 year) and having at least 60% of adjusted ordinary gross income consist of investment-type income:
  + net rent (if < 50% of ordinary income)
  + interest that is taxable (nontaxable is excluded)
  + royalties (but not mineral , oil, gas, copyright royalties)
  + dividends from unrelated domestic corporation
• 20% tax rate on net income not distributed
• self-assessed by filing a separate schedule 1120 PH along with form 1120
• may deduct federal income taxes and LTCG related to federal income taxes