Module 16

1
Module 16

• AMT and Other Special Corporate Taxes

2
Module Topics

• Corporate alternative minimum tax
• Personal holding company tax
• Accumulated earnings tax

3
The Corporate Alternative Minimum Tax

• Key Learning Objectives
• Understand the parallel income tax system of
  corporate taxation
• Know how to minimize the alternative minimum tax
  liability

4
AMT Background

• Policy reason
• History of individual and corporate provisions
• Compliance burden

5
AMT Concepts

• Parallel tax system
• AMT is a separate tax system
• Differences will exist between regular taxable
  income and AMTI
• Prepayment system
• AMT accelerates income and defers deductions
• Minimum tax credit available for future years

6
Corporate AMT Formula

• Taxable income
• Plus NOL deduction
• Plus tax preferences
• Plus/minus adjustments
• Tentative AMTI
• Plus/minus 75 ACE adjustment
• Minus ATMNOL (90 limit)
• AMTI
• Minus exemption
• AMT base
• (continued)

7
Corporate AMT Formula

• ATM Base
• x 20
• Tentative minimum tax before FTC
• Minus AMT FTC (90 limit)
• Tentative minimum tax
• Minus regular tax (after FTC)
• AMT (if positive)

8
AMT Relief for Small Business C Corporations

• The Taxpayer Relief Act of 1997
• Beginning in 1998
• Small business C corporations do NOT need to
  compute the AMT

9
AMT Relief for Small Business C Corporations

• Requirements for exemption
• Average gross receipts of
• less than 5,000,000
• for the prior three years.
• If a new entity
• not a continuation of a prior business
• automatically exempt for its initial year

10
Common Tax Preferences

• Tax-exempt interest on private activity bonds
• Excess accelerated depreciation on pre-87 realty
• Excess percentage depletion
• Excess intangible drilling costs

11
Common Adjustments

• Post-86 realty
• 40-year straight line
• Post-86 personality
• 150 on regular recovery period
• Property transaction gains and losses
• Long-term contracts

12
Compliance Query AMT Depreciation Adjustments

• ABC Corporation purchased 30,000 of office
  furniture in June.
• It elected to expense 20,000 under 179.
• The furniture is 7-year property
• 200 declining balance for MACRS
• 150 declining balance for ADS
• prior to 1998, ADS was generally also a longer
  recovery period
• What is the AMT depreciation adjustment?

13
Solution--Compliance Query AMT Depreciation
Adjustments

• Cost 30,000
• Sec. 179 expense 20,000
• Depreciable basis 10,000
• allowed for both regular tax and AMT
• MACRS 10,000 x .1429 1,429
• ADS 10,000 x .1071 1,071
• AMT adjustment () 358

14
75 ACE Adjustment

• ACE is another parallel tax system
• Adjustment can be positive or negative
• Limit on negative adjustment
• ACE is a hybrid between AMTI and EP
• Complex calculation rules apply
• Depreciation adjustments
• EP adjustments
• Exclusion adjustments

15
Compliance Query Calculating the ACE Adjustment

• Tentative AMTI 300,000
• (1) ACE 360,000
• (2) ACE 260,000
• Prior years net positive adjustment 22,000
• What is the ACE adjustment for (1) and (2)?

16
Solution--Compliance Query Calculating the ACE
Adjustment

• (1) ACE 360,000
• AMTI 300,000
• Difference 60,000
• x 75
• Positive ACE adjustment 45,000

17
Solution--Compliance Query Calculating the ACE
Adjustment

• (2) ACE 260,000
• AMTI 300,000
• Difference lt40,000gt
• x 75
• Computed ACE adjustment lt30,000gt
• Limited to
  lt22,000gt

18
AMT Exemption

• 40,000
• Reduced by .25 x (AMTI - 150,000)

19
Compliance Query Calculating the AMT Exemption

• XYZ Corporation has AMTI of 270,000
• What is the statutory exemption and AMT base?

20
Solution--Compliance Query Calculating the AMT
Exemption

• Exemption
• 40,000 - .25(270,000-150,000) 10,000
• AMTI
  270,000
• Exemption
  10,000
• AMT Base
  260,000

21
Personal Holding Company Tax

• Key Learning Objectives
• Recognize the conditions in which the personal
  holding company tax applies
• Know the components of the tax computation
• Explore opportunities for avoiding the tax

22
PHC Tax--Overview

• Penalty tax on incorporated pocketbooks
• 39.6 rate applied to undistributed PHCI
• Tax can be avoided by making sufficient dividend
  distributions

23
PHC Definition

• C Corps are PHCs if they meet
• Stock ownership test, and
• Passive income test

24
Stock Ownership Test

• 5 or fewer individual shareholders...
• Own gt 50 in value of the stock
• Sec. 544 stock attribution rules apply
• At any time during last half of year

25
Passive Income Test

• PHCI AOGI ????60
• Common PHCI items
• Dividends interest annuities rents royalties
  certain personal service contracts
• AOGI typically consists of
• Ordinary gross income
• Less certain rent and royalty related expenses

26
Compliance Query

• Z Corporation has 5 shareholders and the
  following income for the year
• Gross merchandising income 80,000
• Capital gains 40,000
• Interest income 45,000
• Dividend income 35,000
• Adjusted income from rents 30,000
• Is Z corporation a PHC?

27
Solution--Compliance Query

• PHCI 110,000 (45,000 35,000 30,000)
• AOGI 190,000 (80,000 110,000)
• PHCI ??AOGI .579
• Z Corporation is not a PHC

28
Exclusions From PHCI for Adjusted Income From
Rents

• Rent is excluded from PHCI if
• AIR ???50 of AOGI
• and
• Dividends paid ???(non-rental PHCI - 10 of OGI)

29
Computing the Personal Holding Company Tax

• Taxable income
• Plus positive adjustments
• Minus negative adjustments
• Adjusted taxable income
• Minus dividends paid deduction
• Undistributed PHCI
• x .396
• PHC tax

30
Common Adjustments

• Positive
• Dividend received deduction
• NOL deduction from other than preceding year
• Charitable deduction carryover
• Negative
• Federal income taxes
• Charitable contributions gt 10 limit
• Net capital gain (net of tax)

31
The Dividends Paid Deduction

• Current-year dividends
• Grace period dividends
• 2.5 month and 20 rules
• Consent dividends
• Liquidating dividends
• Dividend carryovers
• Deficiency dividends

32
Avoiding the PHC Tax

• Pay dividends!
• Monitor rent so that it does not fall below 50
  of AOGI
• Do not lag when liquidating a corporation
• Monitor passive income sources
• Disperse stock ownership

33
Accumulated Earnings Tax

• Key Learning Objectives
• Recognize the conditions in which the accumulated
  earnings tax applies
• Know the components of the tax computation
• Explore opportunities for avoiding the tax

34
Accumulated Earnings Tax Overview

• Penalty tax on unreasonably accumulated income
• 39.6 rate applied to accumulated taxable income
• Tax can be avoided by making sufficient dividend
  distributions

35
Motivations to Accumulate Earnings

• Low marginal tax rates (15 25) on first
  75,000 of income
• Retained funds invested in corporate stock
  eligible for 70 or 80 dividend received
  deduction
• Shareholders can hold, then sale their shares and
  get capital gain treatment

36
Establishing a Tax Avoidance Purpose

• Tax applies if tax avoidance is one of the
  purposes of accumulating income
• It need not be the dominant or controlling purpose

37
Preponderance of Evidence and Reasonable
Business Needs

• If a corporation has accumulated its earnings
  beyond the reasonable needs of the business...
• It must prove by the preponderance of the
  evidence that the accumulation was not to avoid
  tax

38
Reasonable Business Needs Good Reasons

• To provide for bona fide expansion of business or
  replacement of plant
• To acquire a business enterprise through
  purchasing stock or assets
• To provide for the retirement of bona fide
  indebtedness created in connection with the trade
  or business

39
Reasonable Business NeedsMore Good Reasons

• To provide necessary working capital for the
  business
• Bardahl formula
• To provide for investments or loans to suppliers
  or customers if necessary
• To provide for the payment of reasonably
  anticipated product liability losses

40
Key Factors

• Plans to use accumulated earnings must be
• Specific
• Definite
• Feasible

41
Research Query

• Does the tax law specify any bad reasons for
  accumulating earnings?

42
Bad Reasons to AccumulateReg. 1.537-2(c)

• Loans to shareholders, relatives, or friends
• Corporate funds used for personal benefit
• Investments in properties or securities unrelated
  to corporations business activities
• Protection against unrealistic hazards

43
Determining the Accumulated Earnings Tax

• Taxable income
• Plus positive adjustments
• Minus negative adjustments
• Adjusted taxable income
• Minus dividends paid deduction
• Minus accumulated earnings credit
• Accumulated taxable income
• x .396
• Accumulated earnings tax

44
Common Adjustments

• Positive adjustments
• Capital loss carryovers and carrybacks
• Dividends received deduction
• Net operating loss deduction
• Charitable deduction carryovers
• Negative adjustments
• Federal income taxes
• Charitable contributions gt 10 limit
• Net capital gains (net of tax)

45
The Dividends Paid Deduction

• Current-year dividends
• Grace period dividends
• No 20 rule
• Consent dividends
• Liquidating dividends

46
The Accumulated EarningsTax Credit

• Safe harbor minimum
• 250,000 (less accumulated earnings at end of
  last year)
• Use 150,000 for certain service companies
• Maximum credit
• Earnings needed to meet reasonable business needs
  (less accumulated earnings at end of last year)