accumulated earnings tax


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Accumulated Earnings Tax

In the United States, a tax on a corporation for retained earnings the IRS deems to be excessive. Retained earnings are profits that are not paid out in dividends. Companies with a low payout ratio generally experience higher price appreciation on their stock, which would subject shareholders to a higher capital gains tax when they sell, rather than a higher tax on dividends. However, the tax rate on capital gains is lower than the tax on dividends. Thus, the accumulated earnings tax exists to ensure that the government is able to receive roughly the same amount in revenue regardless of how much or how little the corporation distributes in dividends.

accumulated earnings tax

A federal tax on a company's retained earnings that are considered in excess of what is reasonable. The purpose of an accumulated earnings tax is to make it more difficult to defer or lower the tax rate (that is, change from ordinary income to capital gains) on income that would ordinarily be paid to stockholders in dividends. For example, stockholders in high tax brackets generally prefer earnings be retained rather than paid in dividends so that they can avoid being taxed at ordinary rates. The position of the Internal Revenue Service is that if the funds are not actually needed by the firm and are only being retained for tax reasons, the accumulated earnings should be taxed.
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The policy reasons for the accumulated earnings tax are similar to PFICs--both sets of rules are intended to apply to a corporation that is holding liquid assets for investment, rather than its active business needs (see H.
The accumulated earnings tax applies to all C corporations, without regard to the number of shareholders in taxable years beginning after July 18, 1984.
During the lifetime of the insured, the internal build-up of cash values should not trigger an accumulated earnings tax problem.
subsidiary would be forced to make distributions in order to avoid application of the accumulated earnings tax (83) for retaining earnings.
Where an uncommitted key individual life insurance policy (of the appropriate amount and type) is used to shift the risk of the loss of a key person's services, it will generally not cause or aggravate an accumulated earnings tax problem.
To encourage corporations to pay dividends rather than accumulating earnings and allowing shareholders to avoid income taxes, the accumulated earnings tax imposes a penalty tax on earnings accumulated beyond the reasonable needs of a business under IRC section 531.
the potential imposition of penalty taxes, such as the accumulated earnings tax applicable to corporations that retain earnings in excess of the reasonable needs of the business
This article explores planning opportunities and defense strategies for corporations potentially exposed to the accumulated earnings tax.
One of the most common is a builder pulling accumulated earnings out of the company, which the IRS might classify as excess accumulated earnings and subject to an accumulated earnings tax.
Chapter 7 covers the determination of consolidated tax liability, delving into areas such as the alternative minimum tax, the personal holding company tax, and the accumulated earnings tax.
When avoidance of the corporate accumulated earnings tax is desired.
personal holding company tax, accumulated earnings tax, dividend treatment, and collapsible corporation rules).

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