Chapter 5: Other

Corporate Tax Levies

Prentice Halls Federal Taxation 2015:
Corporations, Partnerships, Estates and
Trusts

Alternative Minimum Tax

Ensures taxpayers pay a fair
share of taxes irrespective of
exclusions, deductions, and
credits.
Must calculate every year.
Pay greater of regular tax or
AMT.
Accumulated earnings tax is in
addition to regular tax or AMT.
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AMT Formula
Regular TI or Loss (before
NOL)
+ Tax Preference Items
+/- AMT ADJ. Items
Pre ADJ AMTI
+/- 75% x (Pre ADJ AMTI
ACE)ALT Tax NOL DED
ADJ for US Prod. Act.
Ded.
AMTI
- Exemption for
AMT
Tax Base

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AMT Formula (contd)

Tax Base
x 20% Tax Rate
Tentative Min Tax before
- credits
AMT Foreign Tax Credits
Tentative Minimum
- Tax
Regular Tax
AMT Liability ( not less than
0)
Note: Apply any carryforward minimum
tax credit.

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Tax Preference Items

Always

added to regular taxable

income in determining AMTI
Depletion deduction > AB.
Excess IDC > 65% NI from O&G
production.
Tax exempt interest on S&L private
activity bonds - e.g., professional
football stadiums.
Bonds issued to operate an S&L
government is not a preference
item - e.g., schools/public
roads.
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AMT Adjustment Items

Can

either add or subtract from AMTI.

Depreciation
If regular depreciation > AMT depreciation,
add difference to regular TI.
If regular depreciation < AMT depreciation,
subtract difference from regular TI.
Differences between regular & AMT
depreciation:
150% vs. 200% declining balance.
179 expensing.
Bonus depreciation.
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AMT Adjustment Items

Gain

or Losses
May be difference for regular tax
vs. AMT because of depreciation
methods.
If regular tax gain > AMT gain,
subtract difference from regular
income.
If regular tax gain < AMT gain, add
difference to regular income.
If regular tax loss > AMT loss, add
difference to regular
income.
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AMT Adjustment Items

Long-term

contracts
Method same for AMT &
regular tax if large TP.
199 US prod activities
deduction
If AMT 199 deduction >
regular tax, subtract
difference from regular
taxable income.
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AMT Adjustment Items

(contd)

NOL deductions
AMT NOL = Gross Income
deductions based on AMT
rules.
AMT NOL limited to 90% AMTI
before NOL & 199 for AMT.
Carry backs = 2yrs, Carry
forwards = 20 years.
Can elect to carry forward only.
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ACE Adjustments
Adjusted

current earnings
adjustment purpose is to bring
AMTI closer to economic income.
ACE > Preadjustment AMTI add
75% of difference to preadjustment
AMTI.
ACE < Preadjustment AMTI
subtract 75% difference from
preadjustment AMTI.
Negative ACE adjustment limited to
cumulative ACE adjustment
in prior
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Minimum Tax Credit

Any

AMT paid becomes a tax

credit for future years.
Can offset only regular tax that
exceeds TMT.
Example:

Year
1:

AMT = 20,000
C/F MTC = 20,000

Year
2:

Regular tax = 115,000

TMT = 103,000
- Can use $12,000 (115 103)
MTC
- Carryforward indefinitely
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Business Credits
Sum

of all of various business

credits (e.g., R&D,
enterprise).
Offsets regular tax only, not
AMT.
Carry back one year, carry
forward 20 years.
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Business Credits (contd)

Calculating business credit limitation:

Net Income Tax

In excess of:

Greater of:

Reg. tax
+ AMT
- FTC
-Poss. TC
- PR CR

TMT
OR
25% Net Reg. Tax* > $25K

*Net Reg. Tax = Reg. Tax FTC Possible TC PR

CR

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Personal Holding
Company Tax
Applies

to corporations that are

used to shelter passive income
from higher individual tax rates.
Personal Holding Companies
(PHC) are less popular now that
dividends are taxable at a lower
rate than the highest corporate
marginal rate.
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At least 60% of adjusted

ordinary gross income
(AOGI) is PHC income.

> 50% value of stock

directly or indirectly owned
by 5 or fewer individuals.
544 stock attribution rules
apply.

Passive
Income
Reqt
Stock
Ownersh
ip Reqt

Personal Holding Company

Defined

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Personal Holding Company

Income Defined
Annuity
Proceeds
Interest
Income

Dividends

Royalty
Income

PHC
I

Distrib.
from an
Estate or
Trust
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Exclusions from PHCI

Pers
onal
Servi
ce
Cont
ract
Com
pute
r
S/W
Roya
lties

Rent
s
Rental
of
Prope
rty by
>
25%
S/hold
er
Film
Rent
s

O&G
Roya
lties

Copy
right
Roya
lties

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Avoiding PHC Designation

Deficiency
Dividend Carryovers
Dividends
Liquidating
Dividends

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Accumulated Earnings Tax

Penalty

tax on corporations that

dont distribute enough to S/H in
order to avoid double taxation.
Levied on CY addition to
accumulating earnings balance.
TP must prove why accumulating
earnings does not have a tax
avoidance purpose.
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Accumulated Earnings Tax

(contd)
AET

usually arises in the context

of closely-held businesses.

Examples of tax avoidance:

Loans to S/H without a valid business
purpose.
Paying for personal expenses of a S/H.

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Accumulated Earnings Tax

(contd)
Could

have transactions reclassified by

IRS as dividends.
TP can refute tax avoidance assertion
by demonstrating reasonable business
needs:
Definite & feasible plans.
Subsequent events ( e.g., expansion, stock
redemption).
Reasonable working capital needs (facts
and circumstances).
Can also prove with the Bardahl formula.
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Working Capital
Amount of money needed
during operating cycle.
Operating cycle from
acquisition of inventory to
when cash is collected from
customer.
Also calculated by Bardahl
formula.
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Bardahl Formula

Average
Operating X
Cycle
(as a % of
yr)

COGS
+
OP
EXP

Non-cash
expenses
(depreciation)
+
Federal Income
Tax

Working
= Capital
Requirement
s

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Average Operating Cycle

(as a % of year)
=
Invento
ry
Annual
amount
COGS

A/R
amoun
+
t
Annual
Sales

A/P
amount
- Annual
oper. exp.
& Purchases
Non-cash
expense

X 100

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Working Capital
The

working capital requirement is

compared with working capital at
year end.
If the working capital requirement >
year end working capital, then
accumulation for excess OK.
If the working capital requirement <
year end working capital, then
accumulation is deemed to be
unreasonable unless refuted.
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Compliance Issues
AMT

Form 4626.
Minimum Tax Credit Form 8827.
Accumulated Earnings Tax no
schedule Usually assessed by
IRS upon audit.

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Calculating Accumulated Earning Tax

Regular Taxable Income
Add DRD
:
NOL Deduction
Excess Charitable C/O
PY
SubtracAccrued
US & Foreign
Excess
Cap
Loss C/O t:
Taxes
PY
CY Charitable > 10%
Limit
Net C/L
Subtrac Dividends Paid
Net C/G associated
t:
Subtrac Deduction
Accumulated
Earnings
taxes
t:
Cr.
Accumulated
TI Tax
X 15%
Rate
Accumulated Earnings
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Tax Planning
Considerations
Depreciati
on Election

Eliminating
the ACE
Adj.

Multiyear
effects of
AMT

Avoiding
the PHC
Tax

Avoiding
the AET
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Compliance and Procedural

Considerations
Alternative

Minimum Tax Form

4626.
Minimum Tax Credit claims
Form 8827.
PHC Tax Form 1120.
Accumulated Earnings Tax no
return needed. Assessed later
by IRS.
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Financial Statement
Implications
If

paying AMT, then there is an

MTC that carries forward
indefinitely.
ASC 740 requires following:
Temporary differences DTA/DTL =
regular rates x (difference between
book and tax basis).
DTA must include:
MTC carryforward.
Reduce MTC with valuation allowance if
< MLTN.
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END
Chapter 5
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