5-1 ©2011 pearson education, inc. publishing as prentice hall

5-2

OTHER CORPORATETAX LEVIES

Alternative minimum tax (AMT)Personal holding company tax

(PHC)Accumulated Earnings Tax (AET) Tax planning considerationsCompliance and procedural

considerationsFinancial statement implications©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-3

Alternative Minimum Tax AMT (1 of 2)

AMT is an acceleration of a corp’s income taxes

General AMT formulaSmall C corporation exceptionDefinitionsTax preference items

©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-4

Alternative Minimum Tax AMT (2 of 2)

Adjustments to taxable incomeAdjusted current earnings

(ACE)Minimum tax creditTax credits and the AMT

Cannot use general business credit

FTC recomputed for AMTFinancial statement

implications


5-5

AMT Formula(1 of 3)

Taxable income before NOL+ Tax preference items+/- Adjustments to taxable

income other then ACE adjustment andAMT NOL deduction (see Table 1)

= Preadjustment AMTI


5-6

AMT Formula(2 of 3)

Preadjustment AMTI+/- 75% of difference between

preadjustment AMTI and ACE

- AMT NOL deduction= AMTI before US prod activity

ded- Adj for US prod activity

ded= AMTI


5-7

AMT Formula(3 of 3)

AMTI- Statutory exemption= Tax base for AMTx 20% tax rate

= Tentative minimum tax before credits

- AMT FTC

= Tentative minimum tax (TMT)- Regular income tax liability

= AMT (not < $0)


5-8

Small C Corp Exemption from AMT

Initial year: all corps exempt 2nd year: exempt if first year

gross receipts $5M3rd year: exempt if avg. of yr1

and yr 2 gross receipts $7.5MSubsequent years: exempt if

avg. of prior 3 yrs’ gross receipts $7.5M


5-9

Definitions(1 of 2)

Alternative minimum taxable income Tax base for AMT prior to applying

the statutory exemptionStatutory exemption amount

$40,000Reduced by 25% x (AMTI -

$150,000)Fully phased out when AMTI ≥

$310,000


5-10

Definitions(2 of 2)

Tentative minimum taxTax liability based on AMTI less

AMT exemption and AMT tax rateReduced by AMT FTC

Regular taxRegular income tax liability less

FTC and possessions creditsAMT

TMT less regular tax©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-11

Tax Preference Items(1 of 2)

Preference items always increase AMTI

Include the followingExcess depletion

Depletion deduction – adj. depletable basis

Intangible drilling cost deduction less 65% of net income from such property


5-12

Tax Preference Items(2 of 2)

Include the following (continued)Tax exempt interest of certain

private activity bondsExcess of ACRS over straight-line

depreciation on real estate


5-13

Adjustments to Taxable Income

(1 of 3)

May increase or decrease AMTIDepreciation

Different methods and/or recovery periods used to compute AMTI

Basis calculationsAMT basis based on AMT

depreciation


5-14


(2 of 3)

Installment salesCorp may use installment method

for noninventory propertyLong-term contracts

Must use % of completion for AMTLoss limitations

At-risk and passive activity losses must be computed using AMTI


5-15


(3 of 3)

NOL deductionsMust use AMT NOL

U.S. production activities deductionDifferent computation for AMT


5-16

Adjusted Current Earnings (ACE) Adjustment

ACE based on E&P conceptAdjustment

(Preadjustment AMTI – ACE) X 75%Make all positive adjustmentsNegative adjustments

Only when ACE < AMTI Limited to cumulative net positive and

negative adjustmentsCannot have a cumulative net negative

adjustment©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-17

Minimum Tax Credit

Corp may take a credit in future years for AMT paid in previous years if computed regular tax less all non-refundable credits is larger than that year’s TMT

Limited to cumulative net AMT and minimum tax credits

Cannot have a cumulative net minimum tax credit


5-18

Personal Holding Company (PHC)

Prevents closely held C corps from sheltering passive income from higher individual tax rates

Stock ownership requirementPassive income requirementCalculating the PHC Tax


5-19

Stock Ownership Requirement

(1 of 2)

Five or fewer shareholders who own 50% of outstanding stock at any

time during last 6 months of corporation’s tax year


5-20

Stock Ownership Requirement

(2 of 2)

§544 attribution rules applySimilar to §318 attribution rules

except:Family attribution includes ALL

ancestors and lineal descendentsCorp attribution for ALL shareholders

Attribution rules cannot be used to PREVENT a corp from being a PHC


5-21

Passive Income Requirement

(1 of 2)

60% of corp’s AOGI for year is PHCI See Figure 1 for AOGI calculation

PHCI includesDividends, interest, annuity

proceeds, royalties, distributions from estate or trust, certain personal service contracts


5-22

Passive Income Requirement

(2 of 2)

PHCI includes (continued)Rents, unless corp earnings are

predominantly from rental incomeSee Table 2 for tests to determine

exclusions from PHCI


5-23

Calculating the PHC Tax (1 of 3)

Calculate undistributed personal holding company income (UPHCI)See next slide for calculation of

UPHCIApply 15% rate to determine

taxHighest tax rate on dividend

incomeScheduled to revert to highest

individual tax rate after 2010


5-24


Regular taxable income+ Positive adjustments

DRD, NOL, charitable contrib. c/o,leased prop. net loss, excess rent exp.

- Negative adjustmentsAccrued US/foreign inc. taxes, excess

NOL w/o DRD, charitable contrib., after-tax cap. gain

- Dividends-paid deduction

= UPHCI


5-25


Avoiding PHC status withThrowback dividendsConsent dividendsDividend carryoversLiquidating dividendsDeficiency dividends

See Topic Review 3


5-26

Accumulated Earnings Tax

(AET)

Corporations subject to the AETDefinitionEvidence of tax avoidanceEvidence of reasonable needsAET liabilitySee Topic Review 4


5-27

Corporations Subject to the AET

Corporations excluded from AETDomestic and foreign PHCsCorporations exempt from tax

under §§501-505S corporations


5-28

Definition of AET

Penalty tax to compel corps to distribute profits not needed for conduct of its businessTax at highest individual tax rate

on dividends (15% through 2010)S/h must have tax-avoidance

motive to avoid receipt of dividends

Usually applies to closely held corps


5-29

Evidence of Tax Avoidance

Loans to shareholdersCorporate funds spent for

personal benefit of shareholdersLoans to a brother/sister corpInvestments unrelated to corp’s

businessProtection against unrealistic

hazards©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-30

Evidence of Reasonable Needs

Expansion or replacement of facilities

Acquisition of a business enterprise

Debt retirementWorking capital - Bardahl formulaLoans to suppliers or customersProduct liability lossesStock redemptionsBusiness contingencies


5-31

AET Liability(1 of 3)

15% of AE taxable income Scheduled to revert back to highest

individual rate after 2010Issue usually raised one or more

years after tax year in questionOnce determined, liability cannot

be reduced by deficiency dividend


5-32


Dividends actually paid during tax year reduce AETI

AEC available but subject to phaseout


5-33


Regular taxable income+ Positive adjustments

DRD, NOL, charitable contrib. c/o,capital loss carryover

- Negative adjustmentsAccrued US/foreign inc. taxes, excess

net cap.loss, charitable contrib., after-tax cap. gain

- Dividends-paid deduction- Accumulated earnings credit

= Accumulated taxable income


5-34

Tax Planning Considerations

Special AMT electionsEliminating the ACE adjustmentAvoiding the PHC tax

Changing amount and type of income earned by corp

Avoiding the AET


5-35

Compliance and Procedural

Considerations

Alternative minimum taxForm 4626

Personal holding company taxSchedule PH for Form 1120

Accumulated earnings taxNo schedule or return


5-36

Financial Statement Implications

ASC 740 (SFAS 109) requirements for accounting for AMT in fin stmts

1. Measure deferred taxes using regular tax rate

2. Measure total DTA for min tax credit arising from AMT

3. Reduce DTA for min tax credit by valuation allowance if “more likely than not” standard met


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