Lesson: Accumulated Earnings Tax

In this lesson, Nick Palazzolo, CPA, breaks down the details of the accumulated earnings tax and its implication for regular C corporations, focusing on why it penalizes companies for retaining excessive earnings instead of distributing them as dividends. He dives into the tax thresholds for different corporations, the conditions under which certain entities are exempt, and the intricacies of IRS assessments during audits. Nick clarifies the 20% tax rate and outlines strategies corporations can use to justify their earnings retention with legitimate business purposes. Moreover, he differentiates between actual and consent dividends, explaining their respective roles in managing accumulated earnings and avoiding the tax, particularly when liquidity is low. Through practical examples, he demystifies the concept of accumulated earnings, providing clarity on how this tax influences corporate dividend policies.