Accumulated Earnings Tax is a tax imposed by the Internal Revenue Service (IRS) on corporations that retain excessive earnings instead of distributing them to shareholders as dividends. This tax is designed to prevent corporations from using accumulated earnings as a means of avoiding personal income taxes. The Accumulated Earnings Tax is calculated based on the accumulated earnings and profits of the corporation and is levied at a higher rate than the regular corporate income tax. The purpose of this tax is to encourage corporations to distribute earnings to shareholders and discourage the accumulation of excessive profits.
The Accumulated Earnings Tax is a tax imposed by the Internal Revenue Service (IRS) on corporations that retain earnings beyond the reasonable needs of the business. The purpose of the tax is to prevent corporations from avoiding income tax by accumulating earnings rather than distributing them to shareholders as dividends. The tax is imposed at a rate of 20% and is in addition to the regular corporate income tax. Corporations can avoid the tax by demonstrating that the accumulation of earnings is for a legitimate business purpose, such as expansion or investment in new equipment. Failure to pay the Accumulated Earnings Tax can result in penalties and interest charges.
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This glossary post was last updated: 29th March 2024.
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