Question

A corporation could be subject to additional tax if which of the following are true, mark all that apply. a. Personal holding company tax for being a corporation with few owners and more than 50% of the corporation Income is investment type income. Excessive earnings are retained in the corporation and not appropriately distributed to shareholders. b. c. Alternative minimum tax to ensure corporations pay their fair share. Net investment tax for large corporations. d. e. Corporations are only assessed the proportional flat corporate tax rate.

Answer 1

A corporation could be subject to additional taxes for cases "A,B,C & D". Hence the answer for above is a,b,c & d. "E" is the only situation which would not entail additional tax since if corporate organizations are assessed at the flat rates, no additional tax is payable.

Reason for additional tax in case of a,b,c & d is as follows :

a. Personal holding company tax : It is a tax imposed on personal holding company (also known as C corporations) on their undistributed income which is used to shelter passive income.

b. Accumulated earnings tax : It is a tax imposed by government on companies whose retained earnings seem excessive or unreasonable and this tax is imposed to make the company pay dividends instead of retaining the profits.

c. Alternative Minimum tax : If regular tax is less than AMT computed as per tax laws, the taxpayer is manadatorily required to pay the difference.

d. Net investment tax : It is a 3.8% tax on adjusted income calculated in accordance with federal laws. It hits large corporations with huge investment incomes.