Accumulated Earnings and Deferred Compensation

Calculation of the AET "penalty" tax

The Accumulated Earnings Tax is based on the Adjusted Taxable Income (ATI) of the corporation.

Certain adjustments. Adjustments may include both additions and subtractions.

Additions include:

+   capital loss carryovers and carrybacks
+   net operating loss deduction
+   dividends received from other corporations

Subtractions include:

-   corporate income tax for the year
-   charitable contributions without regard to the 10-percent-of-taxable-income limitation
-   capital loss adjustment
-   excess of long-term capital gain over short-term capital loss, adjusted downward by the capital gain tax, and the net capital losses from earlier years

Dividends paid. Payment of dividends reduces the amount of accumulated income that is taxable. The dividends-paid includes the dividends paid during the tax year, which the shareholders must report as ordinary income, along with dividends paid within 4½-month after the close of the taxable year.

Accumulated earnings credit. There are 2 ways to arrive at the accumulated earnings credit:

• Minimum credit. Most corporations are allowed a minimum credit of $250,000 against ATI even if the earnings are accumulated beyond the reasonable needs of the company. For some personal-service corporations that provide professional services (e.g., doctor, engineer, lawyer, architect, and accountant professions), this minimum credit is $150,000.
• Reasonable needs. This calculation is the current earnings that are required to meet the reasonable needs of the company less the net long-term capital gains for the year. We'll look at these needs in the next section.