Taxes: Penalty Taxes

Question 1

Taxes:
Penalty Taxes
Accumulated Earnings Tax

Answer 1

Accumulated Earnings Tax

• corporations are used to shelter money from high individual tax rates
• high levels of accumulated income trigger a penalty tax
• either document business reasons for accumulated income or distributing dividends
• tax of 20%
• dividends include consent dividends, or paid within 2.5 months of year-end

Question 2

Taxes:
Penalty Taxes
Accumulated Earnings Tax
Formula

Answer 2

Accumulated Earnings Tax
Formula
Taxable Income
\+/- Adjustments
- Corporate Income Tax
- Excess charitable contributions
- net capital loss
- net capital gain (after tax)
\+ DRD
- dividends paid or deemed paid
- accumulated earnings credit
= Accumulated Taxable Income

Question 3

Taxes:
Penalty Taxes
Accumulated Earnings Tax
Adjustments

Answer 3

Accumulated Earnings Tax
Adjustments
- less accrued income taxes
- less excess charitable contributions
- net capital loss
- net capital gain after tax
\+ DRD
\+ NOL or capital loss carryovers

Question 4

Taxes:
Penalty Taxes
Accumulated Earnings Tax
Accumulated Earnings Credit

Answer 4

Accumulated Earnings Tax
Accumulated Earnings Credit
= greater of:
- current earnings & profits for “reasonable needs”
- flat $250,000 less accumulated earnings and profits from previous year

Question 5

Taxes:
Penalty Taxes
Personal Holding Company Tax

Answer 5

Personal Holding Company Tax
- triggered by relatively high levels of investment income
- keep income low or pay dividends
- 20% tax if undistributed investment income
Income Test
- PHC income = 60% adjusted ordinary gross income
Ownership Test
- more than 50% value owned by 5 or fewer individuals any time for last half of year

Question 6

Taxes:
Penalty Taxes
Personal Holding Company Tax
Adjustments

Answer 6

Personal Holding Company Tax
Adjustments
- reduce by accrued income tax, excess charity, and net capital gain
+ add DRD and carryover of net operating loss PY