For each of the above provisions, the Portfolio analyzes the ground rules in the section of the Internal Revenue Code and covers the other sections of the Code where these rules are used, detailing any differences in their application. This portfolio can be cited as Brown, 554 T.M., The Attribution Rules. For each class, the Code and the rules it contains contain rules, including exceptions, that are beyond the scope of this discussion and must be taken into account in determining income. The rules on the PFS tax, while useful in some respects, are outdated in others and, therefore, the guidelines in this area leave some uncertainty as to the interpretation of the rules. All loans made to an individual who is a shareholder of a corporation in a taxation year and who owns, directly or indirectly, or at least 10% of the value of the shares outstanding at any time in the year, cannot exceed the total amount of $5,000. However, this does not apply if the shareholder of a small business investment company indirectly or indirectly owns at least five per cent of the ownership shares at any time of the year. This is for a small business where the funds are provided by an investment company or five percent of the value is the outstanding shares. This does not apply to a group of entities that are affiliated if a group member, including joint parents, receives at least 10% or more of its adjusted gross ordinary income for that tax year from external sources. It also does not apply if at least 80% of the amount consists of personal holding income.
Section 543 applies to the amount, as does the adjusted gross ordinary income of the corporation. Text on gross income. At least 60% of adjusted gross income is personal holding companies. A corporation is considered a personal holding company if it meets both the income test and the share ownership test. A restricted-held entity is subject to additional restrictions on the tax treatment of items such as losses of passive activity, risk rules and executive compensation. Letter (c) numbers 2, 6 to 11. L. 88-272, § 225(c)(1), (2), inserted under the exceptions, domestic building and lending associations in section 7701(a)(19) without regard to paragraph 2. (D) and (E), addition of paragraph 6, renamed former Pars.
(10) and (11) as (7) and (8) respectively and omitted the former pars. (6) to (9) concerning personal finance companies, credit companies, loan or investment companies or licensed finance companies. A personal holding company (PHC) is known as Company C, which was formed for the purpose of owning the shares of other companies. Therefore, the holding company does not offer any products or services, but only holds the shares of other companies. However, almost all SSPs maintain investment portfolios that can have significant tax implications if certain criteria are met. An SSP is subject to regular corporate income tax plus an additional tax of 28% of the personal holding company`s retained income. Given that these tax liabilities could become significant, the taxpayer and their advisors should review each CSC before the end of the year so that steps can be taken to ensure that the corporation does not have to pay personal holding tax. Rental income is not considered SSP income if the rental income represents at least 50% of adjusted gross ordinary income and the sum of dividends paid, dividends deemed to have been paid and dividends granted is at least equal to the amount by which the income of other personal holding companies exceeds 10% of ordinary gross income. For the purposes of subsection (c)(6)(B), in the case of a credit or finance corporation that meets the requirements of subsection (c)(6)(A), the statutory income of a corporation that meets the requirements of subsection (c)(6) and is a member of the same related group (as defined in section 1504) to which that corporation belongs shall not be treated as a personal holding company.
The income of the personal holding company is composed as follows: In addition, the allocation rules in accordance with para. 544 provide that the shares held by an enterprise are treated proportionately as the property of its shareholders, partners or assigns and that a person is deemed to be the owner of the shares held either for his family or by or for his partner. For these purposes, the family includes only siblings, spouses, ancestors and direct descendants. Stock options as well as outstanding securities that can be converted into shares are considered outstanding shares in accordance with § 544. Summary – Restricted Corporations (RECs) must take steps not to be classified as Personal Holding Companies (PSCs). If treated as PFS, these businesses would have to pay 28% of undistributed SSP income in addition to regular corporate income tax. Companies can use two tests to determine their status. These are the share ownership test and the gross income test. To avoid falling into the SSP trap, taxpayers can simply disqualify the business in either category.
If this procedure proves inefficient, the company can pay dividends at the end of the year to avoid SSP tax. Another solution is the relief provision, which allows for the payment of a default dividend if a tax shortage on SSPs is discovered. Deductions that may be taken into account may include deductions that are permitted under section 404 or section 162 for reasons. However, there can be no deduction related to the remuneration of personal services rendered by shareholders. Deductions are permitted for property taxes under sections 164 and 167, but are permitted only in both cases to the extent that the property can be used directly in the regular and active conduct of financial or credit activity. Hiring a lawyer can help you understand what is included in business statements. The income requirement is met if at least 60% of the corporation`s adjusted gross income (AOGI) for the tax year is a personal holding company (PHCI). The first step in applying this percentage test is to determine AOGI starting with gross income in accordance with Article 61 and then excluding profits from the sale or disposal of capital property or property in accordance with Article 1231(b)) (Article 543(b)(1)).
Other adjustments are made, such as the deduction of the amount of certain expenses related to rental income, the amount of expenses related to certain royalty income and the amount of certain interest income (§ 543 (b) (2)). The resulting amount is the Company`s AOGI for the year, and the income test under Section 542(a)(1) is met if 60% or more of the IMO consists of amounts attributable to any of the following amounts, as defined in Section 543(a): Personal holding tax is levied on the undistributed income of C corporations that serve as vehicles, to protect passive income. The reasoning is that a company should first and foremost be an active company. The law targets restricted companies that generate significant returns from investments such as royalties, interest, dividends and rents. It is important to avoid SSP status, otherwise additional taxation may be necessary. An SSP must pay corporate income tax of 20%. (From 2003 to 2012, the tax rate was 15%. The rate increased starting in 2013 with the passage of the American Taxpayer Relief Act of 2012). The tax is levied on the undistributed income of the SSPs.
In summary, a personal holding company (PHC) is a C company in which: Bloomberg Tax Portfolio, The Attribution Rules, No. 554, which examines the rules applicable to situations in which a natural or legal person is treated as holding shares held by another for the purposes of different tax rules. The portfolio details six current attribution rules and historically examines the now-repealed rules for former foreign private holding companies: However, two provisions of the Code prevent the use of the corporate form for (in the eyes of the government) unduly accrued income. These are the cumulative income tax (AET) according to §§ 531-537 and the personal holding tax (PHC) according to §§ 541-547. In addition to banks, other companies exempt from SSP include thrift stores, financial or credit companies (if they meet certain criteria). This carries a high risk for affiliates that profit from investments, such as: a bank holding company that has its own investment portfolio. 1962 — Subsection (c) (7). Ed. 87-768 replaced “entitled to carry out the activity of microcredit (consumer credit activity) and to participate actively and regularly therein”, replaced “authorized to carry out the activity of microcredit”, inserted provisions exempting from the definition of “personal holding company” a lending company that represents 80% or more of its gross income from lawful income of national subsidiaries (whose shares represent at least 80% of the voting of all classes of B. shares, of which at least 80 per cent of each class of non-voting shares are held directly by that lending company), which are in turn excluded below par value.
(6), (7), (8) or (9) of this subsection increased the maximum loan amount from $500 to $1,500, if no limit is prescribed, and eliminated provisions requiring loans to mature in no more than 36 months and limited interest, discounts and other charges to an amount equal to simple interest of 3% per month; that are payable in advance and calculated only on outstanding balances. The best outcome for any tightly held company that may be subject to SSP tax is that the tax simply does not apply because the corporation is not an SSP. Simple tax planning that takes due account of the SSP rules can help avoid the application of the SSP tax, for example: by careful consideration of incorporation with five or fewer shareholders or of participation in general for the second half of a tax year, the allocation rules set out in para.