Personal Holding Company Tax Calculator 2026 — §542 PHC
Determine if your C corporation meets the PHC stock ownership and income tests. Calculate the 20% excise tax on undistributed PHC income and the dividends needed to avoid it.
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PHC Excise Tax (20%)
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Stock Ownership Test
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PHC Income Test (60% threshold)
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Undistributed PHC Income
PHC Tax Calculation Summary
How the PHC Two-Test System Works
A corporation is a PHC only if it fails both tests simultaneously. Failing only one test does not trigger PHC status. The stock ownership test looks at whether the corporation is closely held. The income test looks at whether passive/personal-service income dominates the income mix.
The Formula
Stock Test: Top 5 shareholders own > 50% — FAIL means PHC-eligible
Income Test: PHC Income / AOGI >= 60% — FAIL means PHC-eligible
Undistributed PHC Income = Taxable Income - Federal Income Tax - Dividends Paid
PHC Excise Tax = Undistributed PHC Income x 20%
Income Test: PHC Income / AOGI >= 60% — FAIL means PHC-eligible
Undistributed PHC Income = Taxable Income - Federal Income Tax - Dividends Paid
PHC Excise Tax = Undistributed PHC Income x 20%
Example
C-corp: 5 shareholders own 75%, AOGI $500K, PHC income $320K (64%), taxable income $280K:
Stock test: 75% > 50% — FAILS (closely held)
Income test: $320K / $500K = 64% > 60% — FAILS
Both tests fail: PHC status triggered
Undistributed PHC income: $280K - $58.8K tax = $221.2K
PHC excise tax: $221.2K x 20% = $44,240
Stock test: 75% > 50% — FAILS (closely held)
Income test: $320K / $500K = 64% > 60% — FAILS
Both tests fail: PHC status triggered
Undistributed PHC income: $280K - $58.8K tax = $221.2K
PHC excise tax: $221.2K x 20% = $44,240
Sources and References (click to expand)
- IRC Section 542 — Definition of Personal Holding Company
- IRC Section 543 — Personal Holding Company Income Defined
- IRC Section 545 — Undistributed Personal Holding Company Income
- IRS Schedule PH (Form 1120) — U.S. Personal Holding Company Tax
- IRS Publication 542 — Corporations (PHC and Accumulated Earnings)
Extended
PHC Tax Avoidance Calculator
Calculate dividend distribution needed to zero out PHC tax. Compare full vs partial vs deficiency dividend strategies with SVG bar chart
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Distribution Strategy to Avoid PHC Tax
| Strategy | Dividend Amount | PHC Tax Eliminated | Shareholder Tax Cost | Net Benefit |
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Net Tax Cost by Strategy
Frequently Asked Questions
What is a Personal Holding Company (PHC) and what triggers the tax?
A Personal Holding Company (PHC) is a closely-held C corporation that meets two tests under IRC Section 542: (1) the Stock Ownership Test — 5 or fewer individuals own more than 50% of the outstanding stock at any time during the last half of the tax year, and (2) the Income Test — at least 60% of Adjusted Ordinary Gross Income (AOGI) consists of "personal holding company income" (dividends, interest, royalties, certain rents, and personal service income). If both tests are met, the PHC must pay a 20% excise tax on its undistributed PHC income.
What counts as Personal Holding Company income?
PHC income under IRC Section 543 includes: (1) dividends, interest, royalties, and annuities, (2) rent income, UNLESS rents constitute 50% or more of AOGI AND PHC income other than rents is 10% or less of ordinary gross income, (3) mineral, oil, and gas royalties (unless similar test met), (4) copyright royalties (unless similar test met), (5) produced film rents, (6) amounts received from loans to shareholders, (7) personal service contract income where the individual performer owns 25%+ of stock. Most passive income from a C-corp shell company triggers PHC status.
How is Undistributed PHC Income calculated?
Undistributed PHC Income starts with taxable income, then: add back any federal income tax deduction taken, deduct dividends paid (including consent dividends and deficiency dividends), deduct the net capital gain minus the tax on it, deduct the excess of charitable contributions over 10% of taxable income limit. The remaining undistributed PHC income is subject to the 20% PHC excise tax. The PHC tax is reported on IRS Schedule PH attached to Form 1120.
How can a corporation avoid the PHC tax?
There are several strategies: (1) Pay ordinary dividends to shareholders — dividends paid reduce undistributed PHC income dollar for dollar. (2) Pay consent dividends — shareholders agree to include a deemed dividend in income even without receiving cash, but the corporation gets the deduction. (3) Pay deficiency dividends — if the IRS determines PHC status after the year ends, paying dividends within 90 days reduces the PHC tax (but interest and penalties still apply). (4) Restructure income mix to fall below the 60% AOGI threshold. (5) Convert to S corporation status (S corps are not subject to PHC tax).
Does the PHC tax apply to S corporations or LLCs?
No. The Personal Holding Company tax under IRC Section 542 applies only to C corporations. S corporations, LLCs taxed as partnerships, and sole proprietorships are not subject to PHC tax. This is one reason many closely-held businesses elect S corporation status — it eliminates exposure to accumulated earnings tax, PHC tax, and alternative minimum tax issues that affect C corporations.