Module 16
AMT and Other Special
Corporate Taxes
Module Topics

Corporate alternative minimum tax

Personal holding company tax

Accumulated earnings tax
The Corporate Alternative
Minimum Tax
Key Learning Objectives
Understand the parallel income tax system
of corporate taxation
 Know how to minimize the alternative
minimum tax liability

AMT Background
Policy reason
 History of individual and corporate
provisions
 Compliance burden

AMT Concepts

Parallel tax system
 AMT
is a separate tax system
 Differences will exist between regular taxable
income and AMTI

Prepayment system
 AMT
accelerates income and defers deductions
 Minimum tax credit available for future years
Corporate AMT Formula
Taxable income
Plus NOL deduction
Plus tax preferences
Plus/minus adjustments
Tentative AMTI
Plus/minus 75% ACE adjustment
Minus ATMNOL (90% limit)
AMTI
Minus exemption
AMT base
(continued)
Corporate AMT Formula
ATM Base
x 20%
Tentative minimum tax before FTC
Minus AMT FTC (90% limit)
Tentative minimum tax
Minus regular tax (after FTC)
AMT (if positive)
AMT Relief for
Small Business C Corporations
The Taxpayer Relief Act of 1997
 Beginning in 1998

 Small
business C corporations do NOT need to
compute the AMT
AMT Relief for
Small Business C Corporations
Requirements for exemption
 Average gross receipts of

 less
than $5,000,000
 for the prior three years.

If a new entity
 not
a continuation of a prior business
 automatically exempt for its initial year
Common Tax Preferences
Tax-exempt interest on private activity
bonds
 Excess accelerated depreciation on pre-87
realty
 Excess percentage depletion
 Excess intangible drilling costs

Common ± Adjustments

Post-86 realty
 40-year

straight line
Post-86 personality
 150%
on regular recovery period
Property transaction gains and losses
 Long-term contracts

Compliance Query: AMT
Depreciation Adjustments



ABC Corporation purchased $30,000 of office
furniture in June.
It elected to expense $20,000 under §179.
The furniture is 7-year property
 200% declining balance for MACRS
 150% declining balance for ADS
 prior
to 1998, ADS was generally also a longer
recovery period

What is the AMT depreciation adjustment?
Solution--Compliance Query:
AMT Depreciation Adjustments
Cost
Sec. 179 expense
Depreciable basis
30,000
20,000*
10,000
*allowed for both regular tax and AMT
MACRS: 10,000 x .1429 = 1,429
ADS:
10,000 x .1071 = 1,071
AMT adjustment (+)
358
75% ACE Adjustment
ACE is another parallel tax system
 Adjustment can be positive or negative

 Limit
on negative adjustment
ACE is a hybrid between AMTI and E&P
 Complex calculation rules apply

 Depreciation
adjustments
 E&P adjustments
 Exclusion adjustments
Compliance Query: Calculating
the ACE Adjustment
Tentative AMTI = 300,000
(1) ACE = 360,000
(2) ACE = 260,000
 Prior years’ net positive adjustment: 22,000

What is the ACE adjustment for (1) and (2)?
Solution--Compliance Query:
Calculating the ACE Adjustment
(1)
ACE
AMTI
Difference
Positive ACE adjustment
360,000
300,000
60,000
x 75%
45,000
Solution--Compliance Query:
Calculating the ACE Adjustment
(2)
ACE
AMTI
Difference
260,000
300,000
<40,000>
x 75%
Computed ACE adjustment <30,000>
Limited to
<22,000>
AMT Exemption
$40,000
 Reduced by .25 x (AMTI - $150,000)

Compliance Query: Calculating
the AMT Exemption

XYZ Corporation has AMTI of $270,000

What is the statutory exemption and AMT
base?
Solution--Compliance Query:
Calculating the AMT Exemption
Exemption:
40,000 - .25(270,000-150,000) = 10,000
AMTI
Exemption
AMT Base
270,000
10,000
260,000
Personal Holding Company Tax
Key Learning Objectives
Recognize the conditions in which the
personal holding company tax applies
 Know the components of the tax
computation
 Explore opportunities for avoiding the tax

PHC Tax--Overview
Penalty tax on “incorporated pocketbooks”
 39.6% rate applied to undistributed PHCI
 Tax can be avoided by making sufficient
dividend distributions

PHC Definition

C Corps are PHCs if they meet:
• Stock ownership test, and
• Passive income test
Stock Ownership Test
5 or fewer individual shareholders...
 Own > 50% in value of the stock…

 Sec.

544 stock attribution rules apply
At any time during last half of year
Passive Income Test
PHCI ÷ AOGI 60
 Common PHCI items:

 Dividends;
interest; annuities; rents; royalties;
certain personal service contracts

AOGI typically consists of:
 Ordinary
gross income
 Less certain rent and royalty related expenses
Compliance Query:

Z Corporation has 5 shareholders and the
following income for the year:
 Gross
merchandising income
 Capital gains
 Interest income
 Dividend income
 Adjusted income from rents

Is Z corporation a PHC?
80,000
40,000
45,000
35,000
30,000
Solution--Compliance Query:
PHCI = 110,000 (45,000 + 35,000 + 30,000)
AOGI = 190,000 (80,000 + 110,000)
PHCI AOGI = .579
Z Corporation is not a PHC
Exclusions From PHCI for
Adjusted Income From Rents

Rent is excluded from PHCI if:
AIR 50% of AOGI
and
 Dividends paid (non-rental PHCI - 10% of
OGI)

Computing the
Personal Holding Company Tax
Taxable income
Plus positive adjustments
Minus negative adjustments
Adjusted taxable income
Minus dividends paid deduction
Undistributed PHCI
x .396
PHC tax
Common Adjustments

Positive
 Dividend
received deduction
 NOL deduction from other than preceding year
 Charitable deduction carryover

Negative
 Federal
income taxes
 Charitable contributions > 10% limit
 Net capital gain (net of tax)
The Dividends Paid Deduction
Current-year dividends
 Grace period dividends

 2.5
month and 20% rules
Consent dividends
 Liquidating dividends
 Dividend carryovers
 Deficiency dividends

Avoiding the PHC Tax
Pay dividends!
 Monitor rent so that it does not fall below
50% of AOGI
 Do not lag when liquidating a corporation
 Monitor passive income sources
 Disperse stock ownership

Accumulated Earnings Tax
Key Learning Objectives
Recognize the conditions in which the
accumulated earnings tax applies
 Know the components of the tax
computation
 Explore opportunities for avoiding the tax

Accumulated Earnings Tax
Overview
Penalty tax on unreasonably accumulated
income
 39.6% rate applied to accumulated taxable
income
 Tax can be avoided by making
sufficient dividend distributions

Motivations to Accumulate
Earnings
Low marginal tax rates (15%; 25%) on first
$75,000 of income
 Retained funds invested in corporate stock
eligible for 70% or 80% dividend received
deduction
 Shareholders can hold, then sale their shares
and get capital gain treatment

Establishing a Tax Avoidance
Purpose
Tax applies if tax avoidance is one of the
purposes of accumulating income
 It need not be the dominant or controlling
purpose

“Preponderance of Evidence” and
Reasonable Business Needs
If a corporation has accumulated its
earnings beyond the reasonable needs of the
business...
 It must prove by the preponderance of the
evidence that the accumulation was not to
avoid tax

Reasonable Business Needs
“Good” Reasons
To provide for bona fide expansion of
business or replacement of plant
 To acquire a business enterprise through
purchasing stock or assets
 To provide for the retirement of bona fide
indebtedness created in connection with the
trade or business

Reasonable Business Needs
More “Good” Reasons

To provide necessary working capital for
the business
 Bardahl
formula
To provide for investments or loans to
suppliers or customers if necessary
 To provide for the payment of reasonably
anticipated product liability losses

Key Factors

Plans to use accumulated earnings must be



Specific
Definite
Feasible
Research Query

Does the tax law specify any “bad” reasons
for accumulating earnings?
“Bad” Reasons to Accumulate
Reg. § 1.537-2(c)
Loans to shareholders, relatives, or friends
 Corporate funds used for personal benefit
 Investments in properties or securities
unrelated to corporation’s business activities
 Protection against unrealistic hazards

Determining the
Accumulated Earnings Tax
Taxable income
Plus positive adjustments
Minus negative adjustments
Adjusted taxable income
Minus dividends paid deduction
Minus accumulated earnings credit
Accumulated taxable income
x .396
Accumulated earnings tax
Common Adjustments

Positive adjustments
 Capital
loss carryovers and carrybacks
 Dividends received deduction
 Net operating loss deduction
 Charitable deduction carryovers

Negative adjustments
 Federal
income taxes
 Charitable contributions > 10% limit
 Net capital gains (net of tax)
The Dividends Paid Deduction
Current-year dividends
 Grace period dividends

 No
20% rule
Consent dividends
 Liquidating dividends

The Accumulated Earnings
Tax Credit

Safe harbor minimum
 $250,000
(less accumulated earnings at end of
last year)
 Use $150,000 for certain service companies

Maximum credit
 Earnings
needed to meet reasonable business
needs (less accumulated earnings at end of last
year)