actg 451 chapter 18

What is the accumulated earnings tax?

a 20% penalty tax imposed on corporation that accumulate earnings and profits above and beyond reasonable business needs

What is the purpose of the accumulated earning tax?

to prevent C corporations from avoiding income tax at the shareholder level by accumulating rather than distributing excess earnings and profit

Which corporations are excluded from the accumulated earnings tax?

S corporations

personal holding companies

passive foreign investment companies

tax-exempt organizations

How is the AET liability determined?

determined by the IRS only on an audit

The 20% accumulated earnings tax is imposed on a …

corporation’s accumulated taxable income

What are reasonable needs of a business?

items that a corporation requires to meet the future needs of the business and are specific, definite, and feasible plans for use

Examples of reasonable needs of a business

working capital, raw material purchases, equipment updates

Examples of unreasonable needs of a business

investment in property unrelated to the business, loans to shareholders

What is the personal holding company tax?

a 20% penalty tax imposed on corporations that accumulate predominantly investment-type income (other than capital gains)

Explain the two tests to determine if a corporation is a PHC

Stock Ownership: less than 5 individuals own over 50% of the total stock

Income: 60% or more of the adjusted ordinary gross income is personal holding company income

What is the purpose of the PHC tax?

forces the corporation to distribute the dividends to the shareholders

Which corporations are excluded from the PHC tax?

S corporations

foreign corporations

tax-exempt organizations

banks

life insurance companies

How is the PHC tax determined?

self-assessed