When a corporation accumulates earnings without a reasonable business need and does not distribute out dividends to its shareholders, the corporation may be liable for the accumulated earnings tax in addition to its regular corporate income tax.
No. The following types of corporations are not subject to the accumulated earnings tax:
The accumulated earnings tax is basically a 15% tax on the corporation's "accumulated taxable income" for the tax year.
Generally, a corporation's "accumulated taxable income" is calculated as follows:
Corporation's regular taxable income
- Certain federal taxes
- Excess charitable deductions
+ Dividends received deductions
+ Net operating losses
- Certain capital gains and losses
- Dividends paid to shareholders
- Accumulated earnings credit
Accumulated earnings credit is the greater of the following two amounts:
"Earnings and profits" is not the same as a corporation's taxable income, but it resembles more of the corporation's "book" or accounting income.
"Accumulated earnings and profits" is basically a running total of the corporation's earnings and profits over the years less the amount of dividends paid to shareholders during the current tax year (but no later than 2 months and 15 days after the close of the tax year).
There are several ways a corporation can avoid paying this additional tax:
Reasonable business needs include any of the following:
Tax laws are complex and ever-changing. Although there are various tax preparation software on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about your taxes or you need someone to represent you before the IRS, a tax attorney can help you.
Last Modified: 05-06-2018 10:26 PM PDTLaw Library Disclaimer
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