Tax on unappropriated earnings

There are two corporate taxes, and you may be liable for one or the other. The first is the personal holding company tax, the second the accumulated earnings tax, which is probably what you are talking about.

If you're not liable for PHC, you might be liable for AE tax depending upon facts and circumstances. You can use the above arguments but they are strongest if they are backed up with a record of actions (business plans, covenants with lenders limiting dividends, etc.)

Like AMT, the PHC and AE taxes can kick in when you haven't otherwise paid enough tax.

PHC and AE are both designed to inhibit taxpayers from placing either investments or businesses into a corporation and just letting them accumulate money.

Steve

This does not make sense to me. Tax will be paid when the money is finally distributed on a 1099-DIV. Besides the 250k of unappropriated earnings might have already been taxed at 35% or more.

Then take pen and paper in hand and write your congressman. The original intent was to deter owners from unreasonably accumulating capital and the arbitrary cap of 250,000$ was written into the law.

I've not heard of IRS going after such cases in recent years, but time was when every well managed corporation had a dusty copy in the president's desk of a well thought out plan for expansion to justify the accumulated capital yet to be utilized.

ChEAr$, Harlan Lunsford, EA n LA

They were put into action back when corporate tax rates were lower and individual tax rates were higher, so they sort-of made more sense then. In any case, the government wants the tax it is losing by corporations not making dividends.

Steve

As an aside, something which I have NOT seen mentioned (forgive me if I missed it) - THE Accumulated Earnings Tax or AET is NOT a self assessed tax. There is no form to file to declare this. It ONLY APPLIED IF the IRS makes an issue of it during an audit. So for most small businesses its not something they need to worry about, at least not too much.

And I'd like to point out that THIS is another prime example of the advantages of working with a tax pro. Were I, or Harlan, or Paul, or any other of a number of pros who lurk and participate here were doing a return for a company that even looked like it might be an AET target, we could bring that to the attention of management/owners and help them find a way to be prepared for it.

Gene E. Utterback, EA, RFC, ABA

Good thoughts there, Gene. I would go into my archives and pull out my "Bardahl" spreadsheet and use it to see if the accumulated earnings could be justified and discuss results with management.

ChEAr$, Harlan Lunsford, EA n LA

Gee Whiz! I haven't heard the word "Bardahl" in years. But I believe that you are spot on with the reference.

Gene E. Utterback, EA, RFC, ABA

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Drew Edmundson