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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
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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
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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
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AMT Formula (1 of 3)
Taxable income before NOL
+ Tax preference items
+/- Adjustments to taxable income other than ACE adjustment and AMT NOL deduction (see TR C5-1)
= Preadjustment AMTI
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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
x 20% tax rate
= Tentative minimum tax before credits
- AMT FTC
= Tentative minimum tax (TMT)
- Regular income tax liability
= AMT due (if any)
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8. Small C Corp Exemption from AMT
Initial year: all corps exempt
2nd year: exempt if 1st year gross receipts  $5M
3rd year: exempt if avg. of yr 1 and yr 2 gross receipts  $7.5M
Subsequent 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 exemption
Statutory exemption amount
$40,000
Reduced by 25% x (AMTI - $150,000)
Fully phased out when AMTI ≥ $310,000
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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
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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
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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
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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
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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
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15. Adjustments to Taxable Income (3 of 3)
NOL deductions
Must use AMT NOL
U.S. production activities deduction
Different computation for AMT
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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
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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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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
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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
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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
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21. Passive Income Requirement (1 of 2)
 60% of corp’s AOGI for year is PHCI
See Fig. C5-1 for AOGI calculation
PHCI includes
Dividends, interest, annuity proceeds, royalties, distributions from estate, or trust, certain personal service contracts
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22. Passive Income Requirement (2 of 2)
PHCI includes (continued)
Rents, unless corp earnings are predominantly from rental income
See Table C5-2 for tests to determine exclusions from PHCI
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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
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24. Calculating the PHC Tax (2 of 3)
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
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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 C5-3
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26. Accumulated Earnings Tax (AET)
Corporations subject to the AET
Definition
Evidence of tax avoidance
Evidence of reasonable needs
AET liability
See Topic Review C5-4
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27. Corporations Subject to the AET
Corporations excluded from AET
Domestic and foreign PHCs
Corporations exempt from tax under §§
S corporations
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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%)
S/h must have tax-avoidance motive to avoid receipt of dividends
Usually applies to closely held corps
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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
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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
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AET Liability (1 of 2)
15% of AE taxable income
Issue usually raised one or more years after tax year in question
Once determined, liability cannot be reduced by deficiency dividend
Dividends actually paid during tax year reduce AETI
AEC available but subject to phaseout
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32. ©2009 Pearson Education, Inc. Publishing as Prentice Hall
AET Liability (2 of 2)
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
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33. 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
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34. 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
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35. Financial Statement Implications
SFAS No. 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
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36. ©2009 Pearson Education, Inc. Publishing as Prentice Hall