Do You Own a Personal Holding Company
- Even by Accident?
Don't Pay Tax at
the Highest Corporate Rate if You can Avoid It.
A personal
holding company is a closely held corporation whose income is largely from
investments or other income-producing property, such as a rental.
A personal
holding company can be created when a corporation ceases business
operations and the only assets remaining are income-producing investments
such as stocks, bonds, mutual funds, insurance policies, and cash
remaining in an interest-bearing account.
If the income
produced from these types of assets is retained at the corporate level,
the personal holding company tax is imposed. The rate at which this income
is taxed is the highest corporate rate of 35%.
The tax imposed
is in addition to the regular corporate tax.
For the unwary taxpayer, the personal holding company tax can be a trap.
Classification as a personal holding company is made on a year-by-year
basis.
The fact that
the corporation escaped the tax in a prior year is no guarantee that it
will escape it in the future. For this reason, year-end planning is
crucial.
To avoid the
high rate of tax on this type of income, plan to distribute the earnings
on these investments to the shareholders. Even though the shareholders are
required to include this income on their own tax return, it's likely they
will be in a lower tax bracket.
