Ch18IM - 317 Chapter 18 Accumulated Earnings and Personal...

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© 2009 CCH. All Rights Reserved. Chapter 18 317 Chapter 18 Accumulated Earnings and Personal Holding Company Taxes SUMMARY OF CHAPTER Both the accumulated earnings tax and the personal holding company tax serve the same broad objective: to encourage dividend distributions and enforce “double taxation.” The differences between the two taxes should be emphasized. Imposition of the accumulated earnings tax is subjective and depends on why earnings are accumulated. A liberal exemption exists, the greater of $250,000 (sometimes $150,000) or “reasonable business needs,” both reduced by accumulated earnings last year. The tax is based on annual taxable income, with adjustments, although accumulated earnings play an important part. The tax has been applied to public companies. There is no ownership control test. The personal holding company tax is objective and depends on numerical tests, more-than-50-percent control and at-least-60-percent passive income. The tax is self-assessed, imposed on undistributed PHCI on an annual basis, but is rarely paid because of the de f ciency dividend option, unique to the PHC tax. (The consent dividend procedure is available to eliminate or reduce both taxes.) No credit is available. The tax rate for the personal holding company tax, 15 percent, is the same as for the accumulated earnings tax. The tax is imposed only on corporations controlled by f ve or fewer individuals. Accumulated Earnings Tax ¶18,001 Rate and Nature of Tax The accumulated earnings tax is imposed on accumulated earnings “beyond reasonable business needs.” ¶18,015 Basis for Liability Rarely assessed, the accumulated earnings tax is only applicable, as a practical matter, when a corporation has large accumulated earnings invested in liquid assets and cannot demonstrate a good business reason for not distributing its earnings as taxable dividends. ¶18,025 Tax-Avoidance Purpose One of the requirements for a corporation to be subject to the accumulated earnings tax is that the corporation be formed or availed of for the purpose of avoiding income tax being imposed on its shareholders or the shareholders of another corporation. ¶18,035 Reasonable Needs of the Business Once accumulated earnings exceed $250,000 ($150,000 in the case of certain service corporations), the business must be prepared to show a de f nite and feasible plan for the funds. The typical reasons include business expansion, reserves for product liability, and working capital. However, individual reasons are only limited by the situation of the speci f c business. The Bardahl formula should be covered in detail since it establishes an accepted, objective measure of working capital needs. “Bad” facts include shareholder and family member loans and liquid assets invested in assets unrelated to the business. ¶18,045 Computing the Amount of the Accumulated Earnings Tax
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This note was uploaded on 01/16/2011 for the course MBA AC553 taught by Professor Johnson during the Summer '10 term at DeVry Arlington.

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Ch18IM - 317 Chapter 18 Accumulated Earnings and Personal...

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