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Simple English definitions for legal terms
personal-holding-company tax
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A quick definition of personal-holding-company tax:
A personal-holding-company tax is a type of tax that is imposed on a company that mainly holds investments and does not have active business operations. This tax is meant to discourage individuals from using a company to avoid paying personal income tax. Taxes are charges imposed by the government on people, businesses, transactions, or property to generate public revenue. They can take many forms and are used to support government operations and public needs.
A more thorough explanation:
A personal-holding-company tax is a type of tax that is imposed on a holding company. A holding company is a company that owns other companies' stocks, bonds, or assets. The personal-holding-company tax is imposed on the company's undistributed income, which is the income that the company has earned but has not distributed to its shareholders as dividends.
- ABC Holding Company has earned $100,000 in profits but has not distributed any dividends to its shareholders. The company will be subject to the personal-holding-company tax on the $100,000 of undistributed income.
- XYZ Holding Company has earned $50,000 in profits and has distributed $30,000 as dividends to its shareholders. The company will not be subject to the personal-holding-company tax on the $20,000 of undistributed income.
These examples illustrate how the personal-holding-company tax is imposed on the undistributed income of a holding company. If a holding company retains its earnings to avoid paying income tax, it may be subject to this penalty tax.