Tax Computations and Credits Flashcards
When are corporations required to pay their taxes?
They are required to pay estimated taxes on the 15th day of the fourth, sixth, ninth, and twelfth month of the tax year (1/4 of estimated tax is due on each payment)
unequal quarterly payments may be made using the annualized income method; an underpayment penalty will be assessed if these payments are not made on a timely basis and the amount owed on the return is $500 or more
How are small corporations required to pay their taxes?
They pay the lesser of: 100% of the tax on the current year’s return or 100% of the tax on the previous year’s return (this alternative can’t be used for corporations that didn’t owe tax in the previous year or the previous year was less than 12 months)
How are large corporations required to pay their taxes?
They pay 100% of the tax shown on the current year return
a large corporation is one that has taxable income of $1m or more in any of its 3 preceding tax years)
What is the tax rate for corporations and personal service corporations?
They are both subject to a flat tax rate of 21%
What is the accumulated earnings tax?
It is a penalty tax imposed on regular C corporations whose accumulated (retained) earnings are in excess of $250k if the earnings are considered to be improperly retained instead of being distributed as dividends. It is only paid when the IRS assesses the tax because, during an audit, it concluded that insufficient dividends were paid out compared with the amount of earnings accumulated by the corporation
Limits of the accumulated earnings tax
Regular C corporations are entitled to $250k of lifetime accumulated earnings while personal service corporations are entitled to only $150k.
The accumulated earnings tax is not imposed on personal holding companies, tax-exempt corporations, or passive foreign investment corporations
The additional accumulated earnings tax rate is a flat 20%
How can the accumulated earnings tax be avoided?
Dividends paid by the due date of the tax return or hypothetical “consent” dividends may reduce or eliminate the tax (this is an agreement with shareholders where they pick up the dividends in their personal income without an actual distribution being made)
To avoid accumulation of earnings being considered unreasonable by the IRS, there must be a demonstrated specific, definite, and feasible plan for the use of accumulated earnings (reasonable needs) or a need to redeem the corporate stock included in a deceased stockholders gross estate
What is a personal holding company?
corporations set up by high tax bracket taxpayers to channel their investment income into a corporation and shelter that income through the lower regular tax rate (21%) of the corporation, instead of paying their higher individual tax rates on that income
the tax law criteria define personal holding companies as corporations more than 50% owned by 5 or fewer (either directly or indirectly at any time during the last half of the tax year) and having 60% of adjusted ordinary gross income consisting of: net rent, taxable interest, royalties, and dividends
How are personal holding companies assessed additional tax?
They are taxed an additional 20% on personal holding company net income not distributed. Taxable income must be reduced by federal income taxes and net long-term capital gain (net of tax) to determine the undistributed personal holding company income prior to the dividend paid deduction. There is no penalty if net income is distributed in the form of actual or consent dividends
