Personal Holding Company tax

[Unregistered]

CLIENT 1 - Client sold his business and now is left with a C Corporation with assets that consist of cash, stocks and bonds. His income for the current year is capital loss $4,000, interest income $2,000 and expenses (primarily professional fees) of $5,000. I know he is subject to the PHC rules but I am unclear as to whether its on net income or gross PHC income. Any suggestions on avoiding the tax? Any assistance would be appreciated.

CLIENT 2 - Client has a company (C Corp.) that leases equipment to his S corp. construction company. For the last few years it has reported a net loss. This year the company has a rental loss but has capital gains from the sale of fixed assets. Would this company be subject to PHC tax? As of the first of the year the company will not be in the business of selling heavy equipment.

Thanks in advance.

[Unregistered]

correction

The last sentence regarding Client 2 should read HE IS NOW IN THE BUSINESS OF SELLING HEAVY EQUIPMENT. For some reason it reads is "NOT". Sorry for any confusion.

[Bees Knees]

Download Schedule PH for Form 1120. It is a fairly simple form to fill out. That will tell you how much income, if any, is subject to the 15% tax.

The way to avoid the tax is to pay out the income to the shareholder(s) as a dividend.

[JON]

If your Timely

Salaries work and consent dividend works. Consent dividends work when you file picking up the dividend as if it has been paid. Two forms 972? and something else.. The problem is the timing if you have a fiscal year corproation. As I remember it is done on a timely filed individual return in the year that the corporate return begins.

[Bees Knees]

Another way to avoid PHC penalty taxes is to not be a C corporation. In most cases, a small business should either be structured as an S corporation or an LLC taxed as a sole prop, a partnership, or an S corporation. I think most of us got our C corporation clients to convert to S corporations years ago. So the small practitioner community is not really going to have to worry too much about PHCs, PSCs, Accumulated Earnings tax, or any of the other ridiculous rules C corporations have to deal with.

[Unregistered]

PHC Tax

Thanks for the replys.. He has taken money out of the Corporation (as loans) that could be reclassified as dividends. Hes doesnt have a problem taking the dividend. Heck with the dividend rates being so low now its really not a big deal. I was just curious if he would be required to pay on the net PHC income or gross.

He doesnt want to convert to an S Corp. or liquidate the Corp. right now because he isnt sure what he is going to do with the Corporation and would like some time to think it over before making any changes.

RE: Scenario 2 - Would they be subject to the PHC rules? It was not handled as such in the past. Of course they had losses, so I am not sure that it makes that big of a deal. However this year they have a rental loss and a large capital gain from the sale of equipment.