Mitigating Personal Holding Company (PHC) Tax for Franchisors and Closely Held Businesses

The PHC tax is imposed annually on the undistributed income of a PHC. In simplest terms, PHC tax is an additional 20% annual tax on sheltered passive income. Unlike federal, state, sales, and similar commonly encountered taxes, a corporation may be unaware of its liability for PHC tax. 

Under IRC Section 542, a PHC is any corporation that meets an adjusted ordinary gross income requirement and a stock ownership requirement. A company satisfies the gross income requirement if 60% of its adjusted ordinary gross income is PHC income. The stock ownership requirement is met if, for the last half of the taxable year, more than 50% of the value of a corporation's outstanding stock is owned, directly or indirectly, by five or fewer individuals. 

Royalties are included explicitly in regulation § 1.543-1(b)(3) as PHCI. Since franchise fees are often classified as royalties, this income, and whether the PHC criteria are met, creates particular concerns for franchisors. 

Steps can be taken to mitigate or avoid PHC tax. Franchises, franchisors, other closely held businesses, and their advisers must understand the application of Section 542, the PHC tax, to alleviate this potential tax burden.

Listen as our panel of corporate tax specialists explains the application of PHC tax for franchisors and other businesses.

I. Introduction

A. Closely held C corporations

II. PHC tax general rules

III. Categorizing franchise income

A. Section 1253

B. Royalties vs. compensation for services

C.  S corporation treatment vs. C corporation treatment

IV. Passive activity rules for closely-held C corporations

A. Net operating loss treatment vs. PAL

V. Royalties: passive activity or portfolio income

VI. Interplay of passive activity rules with PHC rules

VII. Reporting PHC: Form 1120, U.S. Personal Holding Company (PHC) Tax

VIII. Strategies for mitigating PHC tax

A. Contract language

B. Avoiding portfolio income classification

C. PHC distributions

D. Electing S status 

The panel will cover these and other critical issues:

• Identifying PHCI
• Meeting the stock ownership requirement
• Strategies for mitigating PHC tax
• Categorizing franchise income

Learning Objectives

After completing this course, you will be able to:

• Identify businesses potentially subject to personal holding company (PHC) tax
• Determine actions to take to mitigate PHC tax
• Decide how PHC tax is calculated and reported
• Ascertain the impact of PHC tax on franchisors

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of corporate taxation, including taxation of businesses, accounting methods, net operating losses and loss limitations; familiarity with net operating loss carry-backs and carry-forwards.

  
  

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).