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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
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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
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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
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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
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5-6
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
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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)
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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
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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
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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
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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
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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
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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
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Adjustments to Taxable Income
(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
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5-15
Adjustments to Taxable Income
(3 of 3)
NOL deductionsMust use AMT NOL
U.S. production activities deductionDifferent computation for AMT
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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
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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
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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
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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
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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
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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
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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
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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
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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 adjustmentsAccrued US/foreign inc. taxes, excess
NOL w/o DRD, charitable contrib., after-tax cap. gain
- Dividends-paid deduction
= UPHCI
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Calculating the PHC Tax (3 of 3)
Avoiding PHC status withThrowback dividendsConsent dividendsDividend carryoversLiquidating dividendsDeficiency dividends
See Topic Review 3
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Accumulated Earnings Tax
(AET)
Corporations subject to the AETDefinitionEvidence of tax avoidanceEvidence of reasonable needsAET liabilitySee Topic Review 4
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Corporations Subject to the AET
Corporations excluded from AETDomestic and foreign PHCsCorporations exempt from tax
under §§501-505S corporations
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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
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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
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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
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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
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AET Liability(2 of 3)
Dividends actually paid during tax year reduce AETI
AEC available but subject to phaseout
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AET Liability(3 of 3)
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
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Tax Planning Considerations
Special AMT electionsEliminating the ACE adjustmentAvoiding the PHC tax
Changing amount and type of income earned by corp
Avoiding the AET
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Compliance and Procedural
Considerations
Alternative minimum taxForm 4626
Personal holding company taxSchedule PH for Form 1120
Accumulated earnings taxNo schedule or return
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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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