Accumulated Earnings and Deferred Compensation

INTRODUCTION

This course focuses on two ways that small corporations or closely held corporations (i.e. few shareholders) try to reduce the tax burden of top executives through accumulated earnings and deferred compensation.

• Accumulated Earnings: In a good economic climate, a company may discover that it has more earnings than it wants to distribute to stockholders. The government's response is to attempt to prevent this "over-accumulation" through various taxes on these undistributed earnings. These may also be referred to as retained earnings and are recorded on the company’s balance sheet as shareholders’ equity.
• Deferred Compensation: Deferred compensation programs postpone payment of compensation to executives until some future date — often until retirement.

Q: How do executives look at deferred compensation?

A: As a way to reduce or at least defer taxes on earned income.

Course Overview

First this course will look at accumulated earnings. What profits can a business hold onto without tax penalty each year?

This is a crucial taxation question due to the double taxation of dividends. The US government does not look favorably on accumulated earnings and has strict rules regarding how much a company can retain for business needs. We will examine these rules and their associated taxes.

Then we will look at how deferred compensation can create a liability for a company. We will explain both qualified and nonqualified plans, including:

• excess benefit plans
• secular trusts
• deferred bonuses
• stock options
• phantom stock
• vested trusts (rabbi and secular trusts)
• stock appreciation rights (SARs)
• supplemental executive retirement plans (SERPs)
• golden parachutes

Upon completion of this course you will be better prepared to assist your organization, its stockholders and employees in offering effective deferred compensation programs.

Let’s begin...