Accumulated Earnings and Deferred Compensation

Tax computation

The 2026 tax rate for the PHC is 20%. The tax is based on the amount of undistributed PHC income for the year. This tax is in addition to the federal corporate income tax. The undistributed PHC income figure is the taxable income of the PHC adjusted for certain factors. The adjustments are both additions and subtractions as follows:

PHC Dividends paid

There are 5 types of dividends paid:

1. Current year dividends paid. All dividends actually paid during the tax year reduce the taxable base. The caveat is that the distributions must have been on a pro-rata basis.
2. Subsequent year dividends paid. A 4½-month grace period exists following the close of the tax year. Dividends paid in this time period are counted as paid in the immediate past tax year. The amount may not exceed:
   
   
   1. the total taxable income for the tax year
   OR
   2. 20% of the total dividends distributed during the tax year
   
   
3. Consent dividends. Stockholders can agree on a hypothetical distribution of corporate income that is then taxable to the stockholders. The shareholders' basis in the stock is increased by the amount of the dividend. This agreement must be made before income taxes are filed.
4. Carryover dividend. Any excess of dividend payments over the past 2 tax years may be deducted in the current year.
5. Deficiency dividend. A delayed dividend distribution may be made in the subsequent year in order to avoid the PHC penalty tax. There must be a cash distribution made within 90 days of the determination that a PHC penalty tax will be incurred by a court decision or that an agreement is made with the taxing authorities. The deficiency dividend doesn't relieve the taxpayer of interest, additional amounts or penalties in regard to the PHC tax. The benefits are applicable when an examination results in an agreed deficiency in Personal Holding Company (PHC) tax.

Example PHC Tax on Undistributed Income

A PHC has taxable income of $400,000 and a regular federal income tax liability of $100,000. The company claims a $25,000 dividends-received deduction and pays dividends of $19,000. The PHC tax is: