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MODULE 36 TAXES: CORPORATE 577

Taxable Income
+ Dividends-received deduction
+ Net operating loss deduction (except NOL of immediately preceding year allowed without a dividends-
received deduction)
- Federal and foreign income taxes
- Charitable contributions in excess of 10% limit
- Net capital loss
- Net LTCG over NSTCL (net of tax)
Adjusted Taxable Income
- Dividends paid during taxable year /
- Dividends paid within 2 112 months after close of year (limited to 20% of dividends actually paid during year)
- Dividend carryover
- Consent dividends
Undistributed PHC Income
x 15%
Personal Holding Company Tax

5. Consent dividends are hypothetical dividends that are treated as if they were paid on the last day

of the corporation's taxable year. Since they are not actually distributed, shareholders increase
their stock basis by the amount of consent dividends included in their gross income.
6. PHC tax liability for a previous year (but not interest and penalties) may be avoided by payment of
a deficiency dividend within ninety days of a "determination" by the IRS that the corporation was
a PHC for a previous year.
7. Corporations may be subject to an accumulated earnings tax (AET), in addition to regular
income
tax, if they accumulate earnings beyond reasonable business needs in order to avoid a shareholder tax
on dividend distributions.
8. The tax is not self-assessing, but is based on the IRS' determination of the existence of tax avoid-
ance intent.
9. AET may be imposed without regard to the number of shareholders of the corporation, but does
not apply to personal holding. companies.
10. Accumulated earnings credit is allowed for greater of
(1) $250,000 ($150,000 for personal service corporations) minus the accumulated earnings and
profits at end of prior year, or
(2) Reasonable needs of the business (e.g., expansion, working capital, to retire debt, etc.),
11. Balance of accumulated taxable income is taxed at 15% tax rate
12. The AET may be avoided by dividend payments sufficient in amount to reduce accumulated tax-
able income to zero.
13. The accumulated earnings tax is computed as follows:
Taxable Income
+ Dividends-received deduction
+ NOL deduction
- Federal and foreign income taxes
- Excess charitable contributions (over 10% limit)
- Net capital loss
- Net LTCG over net STCL (net of tax)
Adjusted Taxable Income
- Dividends paid last 9 112 months of tax year and 2 112 months after close
- Consent dividends
- Accumulated earnings credit
Accumulated Taxable Income
x 15%
Accumulated Earnings Tax

G. S Corporations
An S corporation generally pays no corporate income taxes. Instead, it functions as a pass-through
entity (much like a partnership) with its items of income, gain, loss, deduction, and credit passed through
and directly included in the tax computations of its shareholders. Electing small business corporations are
designated as S corporations; all other corporations are referred to as C corporations.

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