Accumulated Earnings Tax – C Corporations
The C-Corporation, as an entity, is subject to corporate level tax on its net income or profits. Once taxed at the corporate level, the remaining “after tax” profits can be distributed as dividends, paid as bonuses, or retained by the company. Excess profits re-invested back into the company are referred to as retained earnings. Generally, a reasonable amount of retained earnings, or retained earnings specifically ear marked for future company expansion or major equipment purposes are not scrutinized by the IRS. If the IRS deems accumulated earning to be excessive as compared to the reasonable needs of the company, the IRS can take the position the dollars represent unpaid dividends. The accumulated earnings tax of 39.6% (individual rate) will apply in addition to the regular corporate tax. Remember unlike a salary or bonus, a dividend is not deductible by the company. But be cautious, before you get the idea of clearing the retained earnings account by paying large salaries or bonuses to the owner(s) read the excessive compensation article elsewhere in our Blog.
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