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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
Note
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