2009 Pearson Education Inc Publishing as Prentice Hall

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© 2009 Pearson Education, Inc. Publishing as Prentice Hall 5 -1

© 2009 Pearson Education, Inc. Publishing as Prentice Hall 5 -1

OTHER CORPORATE TAX LEVIES ® Alternative minimum tax (AMT) ® Personal holding company tax

OTHER CORPORATE TAX LEVIES ® Alternative minimum tax (AMT) ® Personal holding company tax (PHC) ® Accumulated Earnings Tax (AET) ® Tax planning considerations ® Compliance and procedural considerations ® Financial statement implications © 2009 Pearson Education, Inc. Publishing as Prentice 5 -2

Alternative Minimum Tax AMT (1 of 2) ® AMT is an acceleration of a

Alternative Minimum Tax AMT (1 of 2) ® AMT is an acceleration of a corp’s income taxes ® General AMT formula ® Small C corporation exception ® Definitions ® Tax preference items © 2009 Pearson Education, Inc. Publishing as Prentice 5 -3

Alternative Minimum Tax AMT (2 of 2) ® Adjustments to taxable income ® Adjusted

Alternative Minimum Tax AMT (2 of 2) ® Adjustments to taxable income ® Adjusted current earnings (ACE) ® Minimum tax credit ® Tax credits and the AMT Cannot use general business credit FTC recomputed for AMT ® Financial statement implications © 2009 Pearson Education, Inc. Publishing as Prentice 5 -4

AMT Formula (1 of 3) Taxable income before NOL + Tax preference items +/-

AMT Formula (1 of 3) Taxable income before NOL + Tax preference items +/- Adjustments to taxable income other than ACE adjustment and AMT NOL deduction (see TR C 5 -1) = Preadjustment AMTI © 2009 Pearson Education, Inc. Publishing as Prentice 5 -5

AMT Formula (2 of 3) Preadjustment AMTI +/- 75% of difference between preadjustment AMTI

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 © 2009 Pearson Education, Inc. Publishing as Prentice 5 -6

AMT Formula (3 of 3) = x = = = AMTI Statutory exemption Tax

AMT Formula (3 of 3) = x = = = AMTI Statutory exemption Tax base 20% tax rate Tentative minimum tax before credits AMT FTC Tentative minimum tax (TMT) Regular income tax liability AMT due (if any) © 2009 Pearson Education, Inc. Publishing as Prentice 5 -7

Small C Corp Exemption from AMT ® Initial year: all corps exempt ® 2

Small C Corp Exemption from AMT ® Initial year: all corps exempt ® 2 nd year: exempt if 1 st year gross receipts $5 M ® 3 rd year: exempt if avg. of yr 1 and yr 2 gross receipts $7. 5 M ® Subsequent years: exempt if avg. of prior 3 yrs’ gross receipts $7. 5 M © 2009 Pearson Education, Inc. Publishing as Prentice 5 -8

Definitions (1 of 2) ® Alternative minimum taxable income Tax base for AMT prior

Definitions (1 of 2) ® Alternative minimum taxable income Tax base for AMT prior to applying the statutory exemption ® Statutory exemption amount $40, 000 Reduced ¬Fully by 25% x (AMTI - $150, 000) phased out when AMTI ≥ $310, 000 © 2009 Pearson Education, Inc. Publishing as Prentice 5 -9

Definitions (2 of 2) ® Tentative minimum tax Tax liability based on AMTI less

Definitions (2 of 2) ® Tentative minimum tax Tax liability based on AMTI less AMT exemption and AMT tax rate Reduced by AMT FTC ® Regular tax Regular income tax liability less FTC and possessions credits ® AMT TMT less regular tax © 2009 Pearson Education, Inc. Publishing as Prentice 5 -10

Tax Preference Items (1 of 2) ® Preference items always increase AMTI ® Include

Tax Preference Items (1 of 2) ® Preference items always increase AMTI ® Include the following Excess depletion ¬Depletion deduction – adj. depletable basis Intangible drilling cost deduction less 65% of net income from such property © 2009 Pearson Education, Inc. Publishing as Prentice 5 -11

Tax Preference Items (2 of 2) ® Include the following (continued) Tax exempt interest

Tax Preference Items (2 of 2) ® Include the following (continued) Tax exempt interest of certain private activity bonds Excess of ACRS over straight-line depreciation on real estate © 2009 Pearson Education, Inc. Publishing as Prentice 5 -12

Adjustments to Taxable Income (1 of 3) ® May increase or decrease AMTI ®

Adjustments to Taxable Income (1 of 3) ® May increase or decrease AMTI ® Depreciation Different methods and/or recovery periods used to compute AMTI ® Basis calculations AMT basis based on AMT depreciation © 2009 Pearson Education, Inc. Publishing as Prentice 5 -13

Adjustments to Taxable Income (2 of 3) ® Installment sales Corp may use installment

Adjustments to Taxable Income (2 of 3) ® Installment sales Corp may use installment method for noninventory property ® Long-term Must ® Loss contracts use % of completion for AMT limitations At-risk and passive activity losses must be computed using AMTI © 2009 Pearson Education, Inc. Publishing as Prentice 5 -14

Adjustments to Taxable Income (3 of 3) ® NOL deductions Must ® U. S.

Adjustments to Taxable Income (3 of 3) ® NOL deductions Must ® U. S. use AMT NOL production activities deduction Different computation for AMT © 2009 Pearson Education, Inc. Publishing as Prentice 5 -15

Adjusted Current Earnings (ACE) Adjustment ® ACE based on E&P concept ® Adjustment (Preadjustment

Adjusted Current Earnings (ACE) Adjustment ® ACE based on E&P concept ® Adjustment (Preadjustment AMTI – ACE) X 75% Make all positive adjustments Negative adjustments ¬Only when ACE < AMTI ¬Limited to cumulative net positive and negative adjustments ªCannot have a cumulative net negative © 2009 Pearson Education, Inc. Publishing as Prentice adjustment 5 -16

Minimum Tax Credit ® Corp may take a credit in future years for AMT

Minimum Tax Credit ® Corp may take a credit in future years for AMT paid in previous years if computed regular tax less all nonrefundable credits is larger than that year’s TMT ¬Limited to cumulative net AMT and minimum tax credits ªCannot have a cumulative net minimum tax credit © 2009 Pearson Education, Inc. Publishing as Prentice 5 -17

Personal Holding Company (PHC) ® Prevents closely held C corps from sheltering passive income

Personal Holding Company (PHC) ® Prevents closely held C corps from sheltering passive income from higher individual tax rates ® Stock ownership requirement ® Passive income requirement ® Calculating the PHC Tax © 2009 Pearson Education, Inc. Publishing as Prentice 5 -18

Stock Ownership Requirement (1 of 2) ® Five or fewer shareholders who own 50%

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 © 2009 Pearson Education, Inc. Publishing as Prentice 5 -19

Stock Ownership Requirement (2 of 2) ® § 544 attribution rules apply Similar to

Stock Ownership Requirement (2 of 2) ® § 544 attribution rules apply Similar to § 318 attribution rules except: ¬Family attribution includes ALL ancestors and lineal descendents ¬Corp attribution for ALL shareholders Attribution rules cannot be used to PREVENT a corp from being a PHC © 2009 Pearson Education, Inc. Publishing as Prentice 5 -20

Passive Income Requirement (1 of 2) ® 60% of corp’s AOGI for year is

Passive Income Requirement (1 of 2) ® 60% of corp’s AOGI for year is PHCI See ® PHCI Fig. C 5 -1 for AOGI calculation includes Dividends, interest, annuity proceeds, royalties, distributions from estate, or trust, certain personal service contracts © 2009 Pearson Education, Inc. Publishing as Prentice 5 -21

Passive Income Requirement (2 of 2) ® PHCI includes (continued) Rents, unless corp earnings

Passive Income Requirement (2 of 2) ® PHCI includes (continued) Rents, unless corp earnings are predominantly from rental income ¬See Table C 5 -2 for tests to determine exclusions from PHCI © 2009 Pearson Education, Inc. Publishing as Prentice 5 -22

Calculating the PHC Tax (1 of 3) ® Calculate undistributed personal holding company income

Calculating the PHC Tax (1 of 3) ® Calculate undistributed personal holding company income (UPHCI) See next slide for calculation of UPHCI ® Apply 15% rate to determine tax Highest tax rate on dividend income © 2009 Pearson Education, Inc. Publishing as Prentice 5 -23

Calculating the PHC Tax (2 of 3) Taxable income + Positive adjustments DRD, NOL,

Calculating the PHC Tax (2 of 3) Taxable income + Positive adjustments DRD, NOL, charitable contrib. c/o, leased prop. net loss, excess rent exp. - Negative adjustments Accrued US/foreign inc. taxes, excess NOL w/o DRD, charitable contrib. , after-tax cap. gain - Dividends-paid deduction = UPHCI © 2009 Pearson Education, Inc. Publishing as Prentice 5 -24

Calculating the PHC Tax (3 of 3) ® Avoiding PHC status with Throwback dividends

Calculating the PHC Tax (3 of 3) ® Avoiding PHC status with Throwback dividends Consent dividends Dividend carryovers Liquidating dividends Deficiency dividends ® See Topic Review C 5 -3 © 2009 Pearson Education, Inc. Publishing as Prentice 5 -25

Accumulated Earnings Tax (AET) ® Corporations subject to the AET ® Definition ® Evidence

Accumulated Earnings Tax (AET) ® Corporations subject to the AET ® Definition ® Evidence of tax avoidance ® Evidence of reasonable needs ® AET liability ® See Topic Review C 5 -4 © 2009 Pearson Education, Inc. Publishing as Prentice 5 -26

Corporations Subject to the AET ® Corporations excluded from AET Domestic and foreign PHCs

Corporations Subject to the AET ® Corporations excluded from AET Domestic and foreign PHCs Corporations exempt from tax under §§ 501 -505 S corporations © 2009 Pearson Education, Inc. Publishing as Prentice 5 -27

Definition of AET ® Penalty tax to compel corps to distribute profits not needed

Definition of AET ® Penalty tax to compel corps to distribute profits not needed for conduct of its business Tax at highest individual tax rate on dividends (15%) ® S/h must have tax-avoidance motive to avoid receipt of dividends ® Usually applies to closely held corps © 2009 Pearson Education, Inc. Publishing as Prentice 5 -28

Evidence of Tax Avoidance ® Loans to shareholders ® Corporate funds spent for personal

Evidence of Tax Avoidance ® Loans to shareholders ® Corporate funds spent for personal benefit of shareholders ® Loans to a brother/sister corp ® Investments unrelated to corp’s business ® Protection against unrealistic hazards © 2009 Pearson Education, Inc. Publishing as Prentice 5 -29

Evidence of Reasonable Needs ® Expansion or replacement of facilities ® Acquisition of a

Evidence of Reasonable Needs ® Expansion or replacement of facilities ® Acquisition of a business enterprise ® Debt retirement ® Working capital - Bardahl formula ® Loans to suppliers or customers ® Product liability losses ® Stock redemptions ® Business contingencies 5 -30 © 2009 Pearson Education, Inc. Publishing as Prentice

AET Liability (1 of 2) ® 15% of AE taxable income ® Issue usually

AET Liability (1 of 2) ® 15% of AE taxable income ® Issue usually raised one or more years after tax year in question ® Once determined, liability cannot be reduced by deficiency dividend ® Dividends actually paid during tax year reduce AETI ® AEC available but subject to phaseout © 2009 Pearson Education, Inc. Publishing as Prentice 5 -31

AET Liability (2 of 2) + - = Taxable income Positive adjustments DRD, NOL,

AET Liability (2 of 2) + - = Taxable income Positive adjustments DRD, NOL, charitable contrib. c/o, capital loss carryover Negative adjustments Accrued US/foreign inc. taxes, excess net cap. loss, charitable contrib. , after-tax cap. gain Dividends-paid deduction Accumulated earnings credit Accumulated taxable income © 2009 Pearson Education, Inc. Publishing as Prentice 5 -32

Tax Planning Considerations ® Special AMT elections ® Eliminating the ACE adjustment ® Avoiding

Tax Planning Considerations ® Special AMT elections ® Eliminating the ACE adjustment ® Avoiding the PHC tax Changing amount and type of income earned by corp Avoiding the AET © 2009 Pearson Education, Inc. Publishing as Prentice 5 -33

Compliance and Procedural Considerations ® Alternative Form minimum tax 4626 ® Personal holding company

Compliance and Procedural Considerations ® Alternative Form minimum tax 4626 ® Personal holding company tax Schedule PH for Form 1120 ® Accumulated No earnings tax schedule or return © 2009 Pearson Education, Inc. Publishing as Prentice 5 -34

Financial Statement Implications ® SFAS No. 109 requirements for accounting for AMT in fin

Financial Statement Implications ® SFAS No. 109 requirements for accounting for AMT in fin stmts 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 5 -35 1. © 2009 Pearson Education, Inc. Publishing as Prentice

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of

Comments or questions about Power. Point Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business richard. [email protected] Duh. com © 2009 Pearson Education, Inc. Publishing as Prentice Hall 5 -36