Pope Phft2015 Corp Pp Stu 05

Chapter 5

Chapter 5: Other Corporate Tax LeviesPrentice Halls Federal Taxation 2015: Corporations, Partnerships, Estates and Trusts

Alternative Minimum TaxEnsures 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.Copyright 2015 Pearson Education, Inc. 5-2

AMT FormulaPre ADJ AMTICopyright 2015 Pearson Education, Inc. Regular TI or Loss (before NOL)+ Tax Preference Items+/- AMT ADJ. Items+/- 75% x (Pre ADJ AMTI ACE) ALT Tax NOL DED ADJ for US Prod. Act. Ded.

-AMTI- Exemption for AMTTax Base5-3

AMT Formula (contd)Copyright 2015 Pearson Education, Inc. Tax Basex 20% Tax RateTentative Min Tax before credits- AMT Foreign Tax CreditsTentative Minimum Tax- Regular TaxAMT Liability ( not less than 0)Note: Apply any carryforward minimum tax credit.5-4

Tax Preference ItemsAlways added to regular taxable income in determining AMTIDepletion 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 ItemsCan either add or subtract from AMTI.DepreciationIf 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.Copyright 2015 Pearson Education, Inc. 5-6

AMT Adjustment ItemsGain or LossesMay 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. If regular tax loss < AMT loss, subtract difference from regular income.Copyright 2015 Pearson Education, Inc. 5-7

AMT Adjustment ItemsLong-term contractsMethod same for AMT & regular tax if large TP.199 US prod activities deductionIf AMT 199 deduction > regular tax, subtract difference from regular taxable income.Copyright 2015 Pearson Education, Inc. 5-8

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AMT Adjustment Items (contd)NOL deductionsAMT 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.


ACE AdjustmentsAdjusted 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 years. No carryforwards.Copyright 2015 Pearson Education, Inc. 5-10

Minimum Tax CreditAny AMT paid becomes a tax credit for future years.Can offset only regular tax that exceeds TMT.Example:

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Year 1:

AMT = 20,000C/F MTC = 20,000Year 2: Regular tax = 115,000TMT = 103,000- Can use $12,000 (115 103) MTC- Carryforward indefinitely $8,0005-11

Business CreditsSum 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. Copyright 2015 Pearson Education, Inc. 5-12

Business Credits (contd)Calculating business credit limitation:Copyright 2015 Pearson Education, Inc. Reg. tax AMTFTC Poss. TCPR CR+---In excess of:Net Income TaxGreater of: TMTOR25% Net Reg. Tax* > $25K*Net Reg. Tax = Reg. Tax FTC Possible TC PR CR 5-13

Personal Holding Company TaxApplies 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.Copyright 2015 Pearson Education, Inc. 5-14

Personal Holding Company DefinedCopyright 2015 Pearson Education, Inc. 5-15


Personal Holding Company Income DefinedCopyright 2015 Pearson Education, Inc. 5-17

Exclusions from PHCICopyright 2015 Pearson Education, Inc. 5-18


Avoiding PHC DesignationCopyright 2015 Pearson Education, Inc. 5-20

Accumulated Earnings TaxPenalty 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.


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.


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.Copyright 2015 Pearson Education, Inc. 5-23


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. Copyright 2015 Pearson Education, Inc. 5-25

Bardahl Formula

Copyright 2015 Pearson Education, Inc. AverageOperating Cycle (as a % of yr)X=Working Capital RequirementsCOGS +OP EXP Non-cash expenses (depreciation) + Federal Income Tax5-26

Average Operating Cycle (as a % of year)=+- Inventory amountAnnual COGSA/RamountAnnual SalesA/PamountAnnualoper. exp.& Purchases Non-cash expenseX 100Copyright 2015 Pearson Education, Inc. 5-27

Working CapitalThe 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.


Compliance IssuesAMT Form 4626.Minimum Tax Credit Form 8827.Accumulated Earnings Tax no schedule Usually assessed by IRS upon audit.Copyright 2015 Pearson Education, Inc. 5-29

Calculating Accumulated Earning TaxCopyright 2015 Pearson Education, Inc. Regular Taxable Income Add:DRDNOL Deduction Excess Charitable C/O PYExcess Cap Loss C/O - PYSubtract:Accrued US & Foreign TaxesCY Charitable > 10% LimitNet C/LNet C/G associated taxesSubtract:Subtract:Dividends Paid DeductionAccumulated Earnings Cr.Accumulated TI X15% Tax RateAccumulated Earnings Tax5-30

Tax Planning ConsiderationsCopyright 2015 Pearson Education, Inc. 5-31

Compliance and Procedural ConsiderationsAlternative Minimum Tax Form 4626.Minimum Tax Credit claims Form 8827.PHC Tax Form 1120.Accumulated Earnings Tax no return needed. Assessed later by IRS.Copyright 2015 Pearson Education, Inc. 5-32

Financial Statement ImplicationsIf 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.Copyright 2015 Pearson Education, Inc. 5-33

ENDChapter 5Copyright 2015 Pearson Education, Inc. This work is protected by U.S. copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.5-34All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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Pope Phft2015 Corp Pp Stu 05