Accumulated Earnings and Deferred Compensation

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Course Contents

  1. Introduction
    page 1
  2. Accumulated Earnings
    page 2
  3. Deferred Compensation
    page 12
  4. Summary
    page 22
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Non-Inventory Situations

Many corporations have operating cycles without having inventory. This is typically the case with service firms, which can have high costs for salaries and overhead.

One solution is to take a human resource accounting (HRA) approach to determine working capital needs in a non-inventory business. In this approach, the cost of labor replaces the cost of inventory. HRA involves accounting for investment in people and their replacement cost; it also involves the economic value of people in the organization. It is a process of identifying and reporting the investment made in the human resources of the organization that is not accounted for in current conventional accounting systems.

Bardahl Calculation Example Using Minimum Credit ($250,000)

AAA Manufacturing Company is closely held and likely to be subject to the AET. The summarized financial data for 2025 includes:

Taxable income: $425,000
Tax liability: $142,000
Charitable contributions: $31,000
Short-term capital loss: ($26,000)
Dividends received: $76,000
Research & development expenses: $78,000
Dividends paid: $61,000
Accumulated earnings (1/1/2025): $186,000

Assuming that the company has no reasonable business needs to justify further retained earnings, the adjusted taxable income (ATI) is calculated this way:

Taxable income
Plus: 70% Dividends received 		$425,000
$53,200
$478,200
Less: Tax liability
$142,000
  Excess charitable contributions
Short-term loss
Dividends paid
Accumulated earnings minimum credit ($250,000 – $186,000)
 $31,000
$26,000
$61,000
$64,000
    $324,000

Adjusted taxable income (ATI) ($478,200 - $324,000) = $154,200

The accumulated earnings tax on $154,200 at 20% is $30,840.

Memory Jogger

Suppose that the company above had reasonable business needs of $300,000 in 2025. The accumulated earnings tax would be:

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