Even unsuspecting corporations may be liable for tax on unreasonably accumulated earnings
Article Abstract:
The Tax Reform Act of 1986 applies interest payments as part of the penalty for corporations underpaying their accumulated earnings taxes, even in instances when such underpayment is unintentional. Accumulated earnings are profits held by the company to finance future operations. These held profits are taxable only when the amount withheld seems excessive given the company's historical financing needs. Calculations of accumulated earnings, credits applicable to such earnings, and taxes that could be levied on such earnings are explained with reference to the 1985 operating results of a hypothetical corporation. The calculations used follow the Bardahl formula, upheld by the courts and the IRS. This formula involves two steps: (1) defining the corporation's operating cycle, and (2) assessing accumulated earnings needs based upon this cycle.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1987
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Professional corps. can accumulate earnings despite the accumulated earnings tax
Article Abstract:
Professional service companies have to be aware of the accumulated earnings tax. The tax prevents corporations from accumulating earnings to avoid income taxes at the shareholder level. In order to be nontaxable, an accumulation of funds must be for a reasonable, specific, and definite future need. Reasonable needs include contingencies such as hazards, malpractice insurance, a feasible planned business expansion, and a planned diversification. The courts use the Bardahl formula for calculating working capital.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1989
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A product liability loss reserve can avoid the accumulated earnings tax
Article Abstract:
Corporations' retained earnings and profits are subject to accumulated earnings tax, but if these monies are reserved for reasonable product liability losses, the tax may be avoided. The accumulated earnings tax is discussed, and factors companies should consider prior to establishing a product liability loss reserve are reviewed.
Publication Name: Taxation for Accountants
Subject: Business
ISSN: 0040-0165
Year: 1989
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