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
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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