Corporate Tax 3 of 3 (8)

Question 1

Accumulated Earnings Tax (AET)

Answer 1

A 20% penalty tax is imposed on a corporation for accumulating excessive retained earnings to encourage the distribution of dividends. Excessive is considered to be $250,000 for a manufacturing company and $150,000 for a personal services company.

Question 2

Personal Holding Company (PHC)

Answer 2

A tax on the undistributed income of a corporation that has 5 or fewer stockholders and earns 60% or more of its income from passive sources, such as interest, dividends, rents, and royalties. The tax on the undistributed amount is 20%.

Question 3

Schedule M-1 Reconciliation

Answer 3

A corporation’s reconciliation of book (financial statement) income (before special deductions – DRD & NOL Deduction) to taxable income. The reconciling items include both Temporary differences (bad debt expense, warranty expense, depreciation differences), and Permanent differences (municipal bond interest, 50% meals, fines, penalties, premiums paid on key person life insurance).

Question 4

Section 1244 Stock

Answer 4

Stock acquired by a shareholder directly from a corporation with initial capital of $1,000,000 or less, losses on which are deductible as ordinary to the extent of $50,000 for a single taxpayer ($100,000 for married filing jointly) with the excess carried forward indefinitely and deductible as capital losses subject to the $3,000 per year limitation.