One of your corporate clients has 541 personal holding company income in addition to ordinary income...

One of your corporate clients has 541 personal holding company income in addition to ordinary income and has NOT distributed this income to its shareholders. You explain to the company's owner that, because the income is undistributed, the corporation will be subject to:

A) deduction limitations

B) the ordinary corporate income tax

C) carryover of excess income

D) a special tax penalty

Expert Solution

Solution:

A Personal holding company is a corporation in which more than 50 percent of stock is owned by five or less individuals and which receives at least 60 percent of its adjusted ordinary gross income from passive sources.

The personal holding company tax is imposed on the undistributed income of personal holding company. Avoiding PHC status is necessary because it could result in additional taxation. A PHC must pay a corporate tax equal to 20 percent on undistributed PHC income.

Therefore PHC corporation will be subject to a special tax penalty.

Choice D is correct.

ekkarill92 answered 2 years ago

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