5-1 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-2 OTHER CORPORATE TAX LEVIES  Alternative minimum tax (AMT)  Personal holding company tax (PHC)  Accumulated Earnings Tax (AET)  Tax planning considerations  Compliance and procedural considerations  Financial statement implications ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-3 Alternative Minimum Tax AMT (1 of 2)  AMT is an acceleration of a corp’s income taxes  General AMT formula  Small C corporation exception  Definitions  Tax preference items ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-4 Alternative Minimum Tax AMT (2 of 2)  Adjustments to taxable income  Adjusted current earnings (ACE)  Minimum tax credit  Tax credits and the AMT  Cannot use general business credit  FTC recomputed for AMT  Financial statement implications ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-5 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 Hall

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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-7 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 Hall

5-8 Small C Corp Exemption from AMT  Initial year: all corps exempt  2 nd 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 Hall

5-9 Definitions (1 of 2)  Alternative minimum taxable income  Tax base for AMT prior to applying the statutory exemption  Statutory exemption amount  $40,000  Reduced by 25% x (AMTI - $150,000)  Fully phased out when AMTI ≥ $310,000 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-10 Definitions (2 of 2)  Tentative minimum tax  Tax liability based on AMTI less AMT exemption and AMT tax rate  Reduced 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 Hall

5-11 Tax Preference Items (1 of 2)  Preference items always increase AMTI  Include the following  Excess depletion  Depletion deduction – adj. depletable basis  Intangible drilling cost deduction less 65% of net income from such property ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-12 Tax Preference Items (2 of 2)  Include the following (continued)  Tax exempt interest of certain private activity bonds  Excess of ACRS over straight-line depreciation on real estate ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-13 Adjustments to Taxable Income (1 of 3)  May increase or decrease AMTI  Depreciation  Different methods and/or recovery periods used to compute AMTI  Basis calculations  AMT basis based on AMT depreciation ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-14 Adjustments to Taxable Income (2 of 3)  Installment sales  Corp may use installment method for noninventory property  Long-term contracts  Must 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 Hall

5-15 Adjustments to Taxable Income (3 of 3)  NOL deductions  Must use AMT NOL  U.S. production activities deduction  Different computation for AMT ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-16 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 Hall

5-17 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-18 Personal Holding Company (PHC)  Prevents closely held C corps from sheltering passive income from higher individual tax rates  Stock ownership requirement  Passive income requirement  Calculating the PHC Tax ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-19 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 Hall

5-20 Stock Ownership Requirement (2 of 2)  §544 attribution rules apply  Similar to §318 attribution rules except:  Family attribution includes ALL ancestors and lineal descendents  Corp attribution for ALL shareholders  Attribution rules cannot be used to PREVENT a corp from being a PHC ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-21 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 Hall

5-22 Passive Income Requirement (2 of 2)  PHCI includes (continued)  Rents, unless corp earnings are predominantly from rental income  See Table 2 for tests to determine exclusions from PHCI ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-23 Calculating the PHC Tax (1 of 3)  Calculate undistributed personal holding company income (UPHCI)  See next slide for calculation of UPHCI  Apply 15% rate to determine tax  Highest tax rate on dividend income  Scheduled to revert to highest individual tax rate after 2010 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-24 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 Hall

5-25 Calculating the PHC Tax (3 of 3)  Avoiding PHC status with  Throwback dividends  Consent dividends  Dividend carryovers  Liquidating dividends  Deficiency dividends  See Topic Review 3 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-26 Accumulated Earnings Tax (AET)  Corporations subject to the AET  Definition  Evidence of tax avoidance  Evidence of reasonable needs  AET liability  See Topic Review 4 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-27 Corporations Subject to the AET  Corporations excluded from AET  Domestic and foreign PHCs  Corporations exempt from tax under §§  S corporations ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-28 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 dividends  Usually applies to closely held corps ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-29 Evidence of Tax Avoidance  Loans to shareholders  Corporate funds spent for personal benefit of shareholders  Loans to a brother/sister corp  Investments unrelated to corp’s business  Protection against unrealistic hazards ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-30 Evidence of Reasonable Needs  Expansion or replacement of facilities  Acquisition of a business enterprise  Debt retirement  Working capital - Bardahl formula  Loans to suppliers or customers  Product liability losses  Stock redemptions  Business contingencies ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-31 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 Hall

5-32 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 Hall

5-33 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 Hall

5-34 Tax Planning Considerations  Special AMT elections  Eliminating the ACE adjustment  Avoiding the PHC tax  Changing amount and type of income earned by corp  Avoiding the AET ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-35 Compliance and Procedural Considerations  Alternative minimum tax  Form 4626  Personal holding company tax  Schedule PH for Form 1120  Accumulated earnings tax  No schedule or return ©2011 Pearson Education, Inc. Publishing as Prentice Hall

5-36 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 ©2011 Pearson Education, Inc. Publishing as Prentice Hall

Comments or questions about PowerPoint Slides? Contact Dr. Richard Newmark at University of Northern Colorado’s Kenneth W. Monfort College of Business 5-37 ©2011 Pearson Education, Inc. Publishing as Prentice Hall