personal holding company

[theresa d]

corporation owns building. rent covers all expenses and mortgage payments. for tax purposes taxable income is generated as the building is depreciated over 39 years and the mortgage is a 20 year mortgage. since the rent covers mortgage payments there is taxable income due to the difference in the depreciation period and the length of the mortgage.

there is no cash to make any distribution to shareholder (1) as the rent covers yearly cash flow requirements. looks like this corp meets the defination of personal holding corp. rentals must meet two test to be excluded from personal holding corporate income. They meet the test for rental income exceeding 50% of gross income-but do not meet the test that distributions must be at least equal to the excess of PHC income over 10 % of ordinary gross income.

corporation would be subject to 15% additional personal holding corp tax. am i missing something? i'm having a hard time understanding that they would be subject to this additional tax when their cash flow does not provide for any distributions. any help appreciated.

[OldJack]

I think maybe you are missing the fact that there are two 10% tests. If there is PHC income other than rent, the first 10% (of adj gross income) test does not include rent (line 29 & line 30). The second 10% test has to do with dividend distributions.

Here is a worksheet where the only C-corp income is $100,000 Rent and $1 dollar interest income. This is not a PHC. If you didn't have the $1 other PHC income you would be a PHC.

edit: Note that line 6 is zero because rent has been excluded. Therefore, it is not a PHC.

[theresa d]

you're right

that's what i was missing. thanks so much old jack!!

[OldJack]

You are welcome and good luck with explaining it. ha!

[OldJack]

correction

<< If you didn't have the $1 other PHC income you would be a PHC.>>

Actually, this is not true. If your rent income is 100% of the adjusted gross your other PHC income could be zero and still not be a Personal Holding Company. When making the test worksheet I had a formula in line 22 that produced zero in error if the percent was actually 100%. Sorry if this confused anyone, I have since corrected the worksheet calculation.

[theresa d]

thanks old jack

for the correction-i wondered about that but didn't get a chance to follow-up on it. thanks for clarifying and spending the time creating a worksheet. my client is in the clear and i learned something new. Thanks!!!