REG 4 - Tax Computations and Credits

Question 1

Define the accumulated earnings tax? What is the penalty amount of accumulated earnings tax?

Answer 1

Penalty tax imposed when C corporations have retained earnings in excess of $250,000 for regular corporations and $150,000 for personal service corporations.

Question 2

What are the three steps in calculating the accumulated earnings tax?

Answer 2

Step 1: Business need
Beginning Earnings and Profit
Less: Corporation needs
= Beginning excess

Step 2: Lifetime credit 
250,000 (Regular corp)
or
150,000 (Service corp)
Less: Beginning excess
= Remaining credit

Step 3: Taxable income
Less: ALL CHARITY
Less: ALL CAPITAL LOSSES
Less: ALL FEDERAL TAXES
Less: ALL DIVIDENDS PAID 
= Accumulated taxable income
Less: Remaining credit
= Current accumulated taxable income
x 20%
= Accumulated earnings tax

Question 3

Define the two criteria needed to be considered a personal holding company?

Answer 3

A personal holding company is:

• 50% owned by 5 or fewer individuals
• 60% of adjusted gross income consisting of NIRD
  N - Net rent
  I - Interest (TAXABLE)
  R - Royalities
  D - Dividends

Question 4

At what percentage are personal holding companies taxed for net income not distributed?

Answer 4

20% additional tax paid in addition to regular tax and AMT.