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Chapter 5

# Chapter 5 - Chapter 5 Other Corporate Tax Levies Learning...

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Chapter 5 Other Corporate Tax Levies

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Learning Objectives After studying this chapter, you should be able to: 1. Calculate the corporation's alternative minimum tax liability (if any). 2. Determine whether a corporation is a personal holding company (PHC). 3. Calculate the corporation's PHC tax. 4. Determine whether a corporation is liable for the accumulated earnings tax. 5. Calculate the amount of the corporation's accumulated earnings tax. 6. Explain how a corporation can avoid the personal holding company tax. 7. Explain how a corporation can avoid the accumulated earnings tax.
The Corporate Alternative Minimum Tax The Tax Reform Act of 1986 enacted a new alternative minimum tax system for corporations beginning after December 31, 1986. Actually, the corporate AMT produces little tax revenue, \$2.5 billion in 2002 compared to \$151.0 billion from the corporate income tax. Small C corporations are exempt from the alternative minimum tax for tax years beginning after December 31, 1997. A C corporation qualifies as a small corporation if its average gross receipts are \$5 million or less for the three tax years that ended with its first tax year beginning after December 31, 1993 and ends before the tax year for which the AMT exemption is claimed. Once a C corporation qualifies as a small corporation, the AMT exemption continues as long as its average gross receipts are \$7.5 million or less for the three preceding tax years. The operating rules for applying the average gross receipts calculation, which exempts small corporations from AMT, are found on p.C5-2. Example C5-1 illustrates this calculation. Table C5-1 outlines the AMT computation. Basic definitions of terms can be found on p. C5-4. The exemption amount for corporations is \$40,000. This exemption amount is reduced by 25% of the amount by which AMTI exceeds \$150,000. (Table C5-1 may be used at this point to illustrate the computation.) Tax preference items are listed on p. C5-6. Tax preferences will always increase taxable income.

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Adjustments Adjustments require the recomputation of certain income, gain, deduction, and loss items and may either increase or decrease taxable income. These adjustments are listed beginning on p. C5-7 For 1990 and later tax years, a corporation is required to make a positive adjustment equal to 75% of the excess of its adjusted current earnings (ACE) over its pre-adjustment AMTI. ACE is a concept based on the traditional earnings and profits definition found in Sec. 312. ACE equals AMTI for the tax year plus or minus a series of special adjustments described beginning on p. C5-10. (See Examples C5-11 and C5-12). A negative ACE adjustment also can be made when pre-adjustment AMTI exceeds ACE. The negative adjustment is 75% of the excess of pre-adjustment AMTI over ACE, but not in excess of the corporation's prior net positive ACE adjustments.
Minimum Tax Credit The AMT is simply an acceleration of the payment of a corporation's income taxes. When a corporation pays

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Chapter 5 - Chapter 5 Other Corporate Tax Levies Learning...

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