Corporate View:

Shielding Corporate Earnings from Accumulated Earnings Tax

Accumulated earnings tax is 39.6% of your company’s taxable income. This means you lose almost 40% of your earnings when the company makes more money. This occurs to businesses that have tried to shield their earnings from the IRS and somewhere along the way they made a mistake. All it takes is one mistake for Uncle Sam to slap you with the accumulated earnings tax. According to the IRS, "if a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of 39.6%." Following are some legitimate reasons that IRS might consider not imposing accumulated earnings tax on you:

  • The company is expanding
  • Company has an accumulation of less than $250,000
  • The company that offers services in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and performing arts has an accumulation of less than $150,000
  • Regular distributions to stock holders
  • Specific, definite, and feasible plans for use of the earnings accumulation in the business.
  • The amount necessary to redeem the corporation's stock included in a deceased shareholder's gross estate, if the amount does not exceed the reasonably anticipated total estate and inheritance taxes and funeral and administration expenses incurred by the shareholder's estate.

    If the company can show bona fide business reasons for accumulation of earnings, which exist not to benefit them but the stockholders and improvement of facilities and services, the IRS won’t come after you with the accumulated earnings tax. But anytime any of the above reasons are not met and a liability for the accumulated earnings tax is established you will get a notice in the mail from Uncle Sam asking for his 40%, in which case you have thirty days to respond.