Question

Calculate Anaheim Corporation’s excess net passive income tax in each of the following alternative scenarios: (Leave no answer blank. Enter zero if applicable.)

a. Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $30,000.

b. Passive investment income, $100,000; expenses associated with passive investment income, $70,000; gross receipts, $120,000; taxable income if C corporation, $1,200; corporate E&P, $30,000.

c. Passive investment income, $100,000; expenses associated with passive investment income, $40,000; gross receipts, $120,000; taxable income if C corporation, $40,000; corporate E&P, $0.

Answer 1

Before we dive into each question, you should know the general test done to detrmine if excess net passive income tax is applicable.

General Test (Should pass both)

Test 1:- There is earning and profits at end of the year (Given as E&P in this question)

Test 2:- Passive Investment income > 25% of Gross receipts.

a)

General Test (Should pass both)

Test 1:- There is earning and profits of $30,000

Test 2:- Passive Investment income > 25% of Gross receipts. [$100,000 > 25% of  $120,000]

Calculation of  excess net passive income

Excess net passive income = Net passive Income x (Passive Investment income - (25% of Gross receipts)) / (Passive Investment income)

Net passive Income = Passive Investment income - Deductive expenses

Excess net passive income = ($100,000 - $40,000) x ($100,000 - (25% x $120,000)) / $100,000 = $42,000

Excess net passive income should not exceed taxable income if C corporation

In this case  Excess net passive income > taxable income if C corporation ($40,000)

So Excess net passive income = $40,000

Excess net passive income tax = $40,000 x 35% = $14,000

b)

General Test (Should pass both)

Test 1:- There is earning and profits of $30,000

Test 2:- Passive Investment income > 25% of Gross receipts. [$100,000 > 25% of  $120,000]

Calculation of  excess net passive income

Excess net passive income = Net passive Income x (Passive Investment income - (25% of Gross receipts)) / (Passive Investment income)

Net passive Income = Passive Investment income - Deductive expenses

Excess net passive income = ($100,000 - $70,000) x ($100,000 - (25% x $120,000)) / $100,000 = $21,000

Excess net passive income should not exceed taxable income if C corporation

In this case  Excess net passive income > taxable income if C corporation ($1,200)

So Excess net passive income = $1,200

Excess net passive income tax = $1,200 x 35% = $420

c)

General Test (Should pass both)

Test 1:- There is earning and profits of $0

Test 2:- Passive Investment income > 25% of Gross receipts. [$100,000 > 25% of  $120,000]

No Excess net passive income as first test not passed