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Education Inc Publishing as Prentice Hall OTHER CORPORATE TAX LEVIES Alternative minimum tax AMT Personal holding company tax PHC Accumulated Earnings Tax AET Tax planning considerations ID: 330992

2011 tax education pearson tax 2011 pearson education publishing prentice hall amt income minimum amti taxable adjustments phc aet

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Slide1

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide2

OTHER CORPORATE

TAX 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 HallSlide3

Alternative Minimum Tax

AMT (1 of 2)

AMT is an acceleration of a corp’s income taxesGeneral AMT formulaSmall C corporation exceptionDefinitionsTax preference items

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide4

Alternative Minimum Tax

AMT

(2 of 2)Adjustments to taxable incomeAdjusted current earnings (ACE)Minimum tax creditTax credits and the AMTCannot use general business creditFTC recomputed for AMTFinancial statement implications

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide5

AMT Formula

(1 of 3)

Taxable income before NOL+ Tax preference items

+/-

Adjustments to taxable income other then ACE adjustment and

AMT NOL deduction

(see

Table 1

)

=

Preadjustment AMTI

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide6

AMT Formula

(2 of 3)

Preadjustment AMTI+/- 75% of difference between pre- adjustment AMTI and ACE

-

AMT NOL deduction

=

AMTI before US prod activity

ded

-

Adj

for US prod activity

ded

= AMTI

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide7

AMT Formula

(3 of 3)

AMTI

-

Statutory exemption

=

Tax

base for AMT

x

20% tax rate

=

Tentative minimum tax before credits

-

AMT FTC

=

Tentative minimum tax (TMT)

-

Regular income tax liability = AMT (not < $0)

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide8

Small C Corp Exemption

from

AMTInitial year: all corps exempt 2nd year: exempt if first year gross receipts 

$5M

3

rd

year: exempt if avg. of yr1 and yr 2 gross receipts

$7.5M

Subsequent years: exempt if avg. of prior 3 yrs’ gross receipts

$7.5M

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide9

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide10

Definitions

(2 of 2)

Tentative minimum taxTax liability based on AMTI less AMT exemption and AMT tax rateReduced by AMT FTC

Regular tax

Regular income tax liability less FTC and possessions credits

AMT

TMT less regular tax

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide11

Tax Preference Items

(1 of 2)

Preference items always increase AMTIInclude the followingExcess depletionDepletion deduction – adj. depletable basisIntangible drilling cost deduction less 65% of net income from such property

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide12

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide13

Adjustments to Taxable Income

(1 of 3)

May increase or decrease AMTIDepreciationDifferent methods and/or recovery periods used to compute AMTIBasis calculationsAMT basis based on AMT depreciation

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide14

Adjustments to Taxable Income

(2 of 3)

Installment salesCorp may use installment method for noninventory propertyLong-term contractsMust use % of completion for AMT

Loss limitations

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide15

Adjustments to Taxable Income

(3 of 3)

NOL deductionsMust use AMT NOLU.S. production activities deductionDifferent computation for AMT

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide16

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

Cannot have a cumulative net negative adjustment

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide17

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 creditsCannot have a cumulative net minimum tax credit

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide18

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 ©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide19

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide20

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 shareholdersAttribution rules cannot be used to

PREVENT

a corp from being a PHC

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide21

Passive Income Requirement

(1 of 2)

 60% of corp’s AOGI for year is PHCI

See

Figure 1 for

AOGI calculation

PHCI includes

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide22

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide23

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

income

Scheduled to revert to highest individual tax rate after 2010

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide24

Calculating the PHC Tax

(2 of 3)

Regular 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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide25

Calculating the PHC Tax

(3 of 3)

Avoiding PHC status withThrowback dividendsConsent dividendsDividend carryoversLiquidating dividendsDeficiency dividendsSee Topic Review

3

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide26

Accumulated Earnings Tax

(AET)

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide27

Corporations Subject to the AET

Corporations excluded from AET

Domestic and foreign PHCsCorporations exempt from tax under §§501-505S corporations©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide28

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% through 2010)S/h must have tax-avoidance motive to avoid receipt of dividendsUsually applies to closely held corps

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide29

Evidence of Tax Avoidance

Loans to shareholders

Corporate 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 HallSlide30

Evidence of Reasonable Needs

Expansion or replacement of facilities

Acquisition of a business enterpriseDebt retirementWorking capital - Bardahl formulaLoans to suppliers or customers

Product liability losses

Stock redemptions

Business contingencies

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide31

AET Liability

(1 of

3)15% of AE taxable income Scheduled to revert back to highest individual rate after 2010

Issue usually raised one or more years after tax year in question

Once determined, liability cannot be reduced by deficiency

dividend

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide32

AET Liability

(2

of 3)Dividends actually paid during tax year reduce AETI

AEC available but subject to

phaseout

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide33

AET Liability

(3

of 3)

Regular 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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide34

Tax Planning Considerations

Special AMT elections

Eliminating the ACE adjustmentAvoiding the PHC taxChanging amount and type of income earned by corpAvoiding the AET

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide35

Compliance and Procedural Considerations

Alternative minimum tax

Form 4626Personal holding company taxSchedule PH for Form 1120Accumulated earnings taxNo schedule or return

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide36

Financial Statement Implications

ASC 740 (SFAS 109)

requirements for accounting for AMT in fin stmts

Measure deferred taxes using regular tax rate

Measure total DTA for min tax credit arising from AMT

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

©2011 Pearson

Education, Inc. Publishing as Prentice HallSlide37

©2011 Pearson

Education, Inc. Publishing as Prentice Hall