C Corp Questions

[rkhan71]

I am wondering if any have experience with the following:

1. Doubt that an issue, but checking - there is no hidden tax with cash (balance sheet item) at year end - but probably only Accumulations Earnings Tax, possibly? This circumstance involves a closely held company.

2. Gross Sales if it averages greater than $10mm a year for a particular period of time. I know that accrual accounting has to be done, that is a given, but are there any other issues for a retail company with sales greater than $10mm on a somewhat ongoing basis, but not necessarily always? A tax issue, if any, for having sales greater than $10mm for a relevant period of time.

3. This ties in with question 1. somewhat; if a firm is closing out inventory (selling lots of merchandise at year end) to avoid taxation on high balance, high level inventory, whether it affects cash as a potential taxation issue (cash itself as it builds up to high level in its category).

Sorry for some potential dumb questions that a lot of you may know, but would like to know the nuances of the circumstances if any can chime in. Sometimes, as an individual, we do not consider certain relevant information.

Thanks for you help.

Ray

[Snaggletooth]

What are the questions?

Hi Ray, we are dumb when it comes to answering questions sometimes. You pose three "questions" but after reading them I don't
know what the questions are. Seems to me all the "questions" are instead "statements".

Additionally, you present no facts and circumstances surrounding these statements. As we read, we are thrust into the midst of a topic
without any idea what's happening. Try again.

[TXEA]

It seems as if you are asking if a high balance of cash at year end will trigger a possible accumulated earnings tax; however, there is not enough information to reasonably respond to the question (or what I think is your question).

Accumulated Earnings Tax is imposed if it "appears" that the corp is accumulating earnings and profits as opposed to paying them out to shareholders beyond the reasonable needs of the business.

Reasonable Needs might include:

1. Debt retirement
2. Inventory Replenishment
3. Balances held in reserve for self-insurance
4. Equipment Needs
5. Pending legal proceedings
6. Expansion
7. Operating Needs for a reasonable period of time


The above is just a sample of what might justify accumulating earnings; however, realize that a cash balance does not imply that there is a significant accumulation of earnings.

The following is needed:

1. A rough idea of what the balance sheet looks like at the end of the year
2. Dividend history of the corporation
3. In light of 1 & 2, do any of the reasonable needs above apply?

Remember, the corporation does not make the determination as to whether it is subject to the tax and file a form to pay the tax. The IRS asserts the 20% penalty based on its review of everything above. The corporation should be cognizant of the possibility of the penalty should it be an issue.

It may help to clarify your exact questions.

[rkhan71]

I had...

Thanks for comments thus far. I had wanted to generalize with questions that related to the ideas - any tax at end of year on cash accumulation (in cash account), how does averaging greater than $10mm in sales affect any taxation issues (specifics to this sales amount as it pertains to inventory and such, not net profit), and whether the buildup of inventory at end of year, then sold, creating high amount of cash (accumulation of cash), have any taxation issue? I doubt it does but just double checking. Main thing is if sales are greater than $10mm on average and cash accumulation in asset account is a potential tax issue?

I did not want to get into specifics because of long winded info; I just wanted general answers for a general circumstances as it related to the ideas in each question. But I may be able to glean an answer from what was already presented.

Thanks -}

Ray