Chapter C-5 (1).pdf - Acct 4040/8046 Advanced Federal Income Tax Chapter C-5 Accumulated Earnings Tax Personal Holding Company Tax C-Corp Penalty Taxes

Chapter C-5 (1).pdf - Acct 4040/8046 Advanced Federal...

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10/28/2019 1 Acct 4040/8046 Advanced Federal Income Tax Chapter C-5 Accumulated Earnings Tax Personal Holding Company Tax C-Corp Penalty Taxes Taxpayers might try to defer the double-taxation of corporate earnings by not paying dividends Two penalty taxes are imposed on corporations to prevent this: Accumulated Earnings Tax – for Non-PHCs Personal Holding Company Tax – for PHCs Both avoidable!
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10/28/2019 2 Accumulated Earnings Tax A corporation must pay dividends if their accumulated earnings and profits exceed the greater of: $250,000 or Reasonable business needs Dividends paid for a year include: Actual dividends paid during the year Dividends paid within 3.5 months of the end of the year (throwback) Consent Dividends Shareholder agrees to treat a certain amount as a dividend received and then immediately reinvest it in the corporation as paid-in capital. Shareholder recognizes taxable dividend income and increases the basis in their shares. Liquidating distributions Accumulated Earnings Tax If proper dividends are not paid, the IRS will asses Accumulated Earnings Tax Notice: This tax is NOT self-reported Should still calculate! The tax may be assessed as part of a tax audit of the corporation The tax is assessed if the corporation is “formed or used for the purpose of avoiding income tax on its shareholders by accumulating earnings” Instead of distributing earnings to shareholders through dividends With proper planning, no corporation should ever pay the accumulated earnings tax.
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10/28/2019 3 Accumulated Earnings Tax Determining whether a taxpayer’s intent to avoid taxes is very hard Corporations are deemed to be formed to avoid taxes if: the corporation has accumulated earnings beyond the reasonable needs of the business , or the corporation is a mere holding or investment company Reasonable Needs of the Business
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  • Winter '18
  • Jack Armitage

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