Tax Computations and Credits_M4

Question 1

What is a Personal Holding Company (PHC)?

Answer 1

There are two criteria in determining whether a company is a
personal holding company:
a) more than 50% of the stock must be owned by 5 or fewer individuals.
b) at least 60% of the adjusted ordinary gross income must consist of certain investment income (e.g., interest, dividends, etc.). So, the stock ownership test is 50% while the income test is 60%.
* A personal holding company is subject to regular corporate income tax on its taxable income for the year of 21%.
* Taxable income is calculated without regard to distributions made to shareholders. In addition, because the corporation is a personal holding company, it is subject to an additional 20% tax on personal holding company income not distributed.
* It regularly distributes 51% of its taxable income as dividends to its
stockholders.
* Dividends paid is deductible.

Question 2

What is a Regulated Investment Company?

Answer 2

• A regulated investment company is a corporation that is registered under the Investment Company Act of 1940 and some venture capital companies.
• In order to qualify as a regulated investment company, at least 90% of its gross income must be qualified investment source income.
• It must distribute currently at least 90% of its dividend and interest income.
• The benefit of this type of corporation is that, if all requirements are met, the corporation is not taxed on amounts distributed to its shareholders.

Question 3

What is Accumulated Earninings Tax?

Answer 3

It is a penalty tax:

• Imposed only on C-corporations whose accumulated (retained) earnings (Earnings and Profits) is in excess of $250,000 if improperly retained instead of being distributed as dividends to shareholders.
• Personal service corporations are entitled to only $150,000 of accumulated earnings.
• Not imposed on PHC’s, Tax Exempt Organizations, Passive Foreign Investment Corporations.

Calculate T.I. - Federal Income Tax - Accum Earnings Credt ($50K Single others or $100K MFJ

Question 4

What is the requirement for corporation estimated tax payments?

Answer 4

• Corporations must use the annualized income method for calculating its estimated tax payments.
• Corporations can use the preceding year method if it had a income tax liability in the preceding taxable year.