Corporate Accumulated Earnings Tax Lawyers

A corporate tax, which is also known as a corporation or company tax, is a type of fee that is imposed by the federal government on a business’s profits. According to the Federal Tax Cuts and Jobs Act of 2017, the current federal corporate tax rate is 21%; meaning, after all business expenses have been deducted, a corporation will be required to pay the federal government 21% of its total revenue when filing a federal corporate tax return.

An example of this would be if after deducting all legitimate and reasonable business expenses, which are further discussed later on, your corporation made $1 million dollars in revenue. At the time that you file your business’s federal corporate tax return, you will owe 21% of that $1 million dollars in taxes to the federal government; or, $210,000.

It is important to note that the federal corporate tax rate is subject to change. Additionally, states may impose their own separate corporate income tax rates in addition to the federal corporate tax. Not every state applies a state corporate income tax rate, but those that do tend to have rates that vary considerably based on jurisdiction. The standard range for state corporate income tax rates is between 1 and 12%, with most state rates averaging in the middle.

In continuing with the above example, if you live in a state that applies its own separate corporate income tax rate, you will need to deduct both the federal and state tax amounts from your total revenue. Kentucky has a 5% rate, so the federal tax amounts would be $210,000 and the state tax amounts would be $50,000. As such, if your corporation was in Kentucky, you will owe $260,000 in federal and state taxes meaning that you are left with $740,000 of your total profits.

What Are Some Examples Of Corporate Taxes?

In addition to federal and corporate taxes, a corporation may also be required to pay taxes that are specific to certain divisions of a business. Some examples of common types of corporate taxes that a business may be required to pay include:

• Employment or Payroll Taxes: These taxes refer to the percentage that is taken out of an employee’s paycheck. They may be used to pay off taxes, such as those for social security benefits and Medicare, or unemployment;
• Real Estate Taxes: Some businesses may be required to pay real estate taxes on property that it owns. An example of this would be if a corporation owns the building in which it operates;
• Estimated Taxes: In some cases, a business may need to make installment payments on taxes, such as periodically throughout a given tax year. This is generally required when a business expects to owe $500 or more in federal income taxes;
• Franchise Taxes: Some states place a special kind of tax on businesses that want to operate or remain open in their specific state, which is known as a franchise tax; and/or
• Excise Taxes: Excise taxes are only applied to specific goods such as alcohol, gasoline, cigarettes, some luxury goods, and other items that are regulated by various tax laws.

What Is The Corporate Accumulated Earnings Tax?

When a corporation accumulates earnings without a reasonable business need, and does not distribute out dividends to its shareholders, the corporation may be held liable for the accumulated earnings tax. This would be in addition to its regular corporate income tax as was previously discussed.

However, not all corporations will be subject to the accumulated earnings tax. The following types of corporations are generally not subject to the accumulated earnings tax:

• Personal holding companies;
• Foreign personal holding companies;
• Tax-exempt organizations;
• Foreign passive investment companies; and
• S corporations.

Essentially, the accumulated earnings tax is a 15% tax on the corporation’s “accumulated taxable income” for the tax year. Generally speaking, a corporation’s “accumulated taxable income” is calculated as follows:

• The corporation’s regular taxable income;
• Minus certain federal taxes;
• Minus excess charitable deductions;
• Plus dividends received deductions;
• Plus net operating losses;
• Minus certain capital gains and losses;
• Minus dividends paid to shareholders; and
• Minus accumulated earnings credit

Accumulated earnings credit is the greater of the following two amounts:

1. $250,000 or $150,000 for personal service corporations, less the amount of accumulated earnings and profits at the end of last tax year; or
2. The amount of current year earnings and profits that are retained for reasonable business needs, in excess of dividends paid to the shareholders, less the net capital gains deducted in calculating accumulated taxable income.

“Earnings and profits” is not the same as a corporation’s taxable income. Rather it resembles more of the corporation’s “book” or accounting income. “Accumulated earnings and profits” is a running total of the corporation’s earnings and profits over the years, less the amount of dividends paid to shareholders during the current tax year; but, no later than 2 months and 15 days after the close of the tax year.

Reasonable business needs may include any of the following:

1. Expansions of planned facilities and activities;
2. Acquisitions of related businesses;
3. Loans intended to help customers and suppliers of the corporation;
4. Reserves to meet competition; and
5. Contingent liabilities that are considered to be realistically foreseeable.

How Can I Avoid Paying The Accumulated Earnings Tax?

There are several ways in which a corporation can avoid paying this additional tax:

1. Pay dividends to shareholders during the tax year, or within 2 ½ months after the close of the tax year, as was previously mentioned;
2. Issue consent dividends to shareholders, which are treated just like regular dividends to the recipient for income tax purposes, but they do not need to be actually paid out by the corporation;
3. Retain earnings for reasonable business needs and document them in a “specific, definite, and feasible”plan; and/or
4. Do not keep an accumulated earnings balance that exceeds $250,000, or $150,000 for personal service corporations.

How Do I Determine The Amount Of Income Tax That My Business Owes?

The amount of income tax that a business owes will be based on various state and federal laws, as well as the type of business structure that was chosen when the company was initially formed or registered. Each kind of business organization is taxed differently.

Corporations are generally taxed in one of two ways:

• C Corporation: C corporations have what is known as a “double-taxation” issue. C corporations are first taxed at the corporate level. If the business has enough revenue left over to distribute dividends to its owner or shareholders, those dividends will be taxed again both on the corporate level and at the shareholder or personal level; or
• S Corporation: Unlike C corporations, S corporations are a form of pass-through entities. The business itself will not be required to pay federal income taxes; however, the corporate shareholders or owners will need to claim the portion of income that they receive from a business’s profits on their personal income tax returns.

Businesses may also be able to change their elected tax status, in an effort to lower the amount of taxes they owe on company revenue. An example of this would be if a C corporation wanted to switch their elected tax status to an S corporation because S corporations are not subject to the double-taxation issue found in C corporations. Doing so could reduce the amount of income taxes that business owners must pay, because they will only need to report it one single time on their personal tax returns.

Do I Need A Lawyer For Help With Corporate Accumulated Earnings Tax?

Because tax laws are complex and ever-changing, if you are unsure about your taxes or you need someone to represent you before the IRS, you should consult with an experienced tax lawyer. Your tax attorney can help you understand your legal rights and options according to your state’s specific laws, and will also be able to represent you in court, as needed.