Accumulated earnings tax

[steve7150]

Hi, I'm a new member and one of my clients is an importing C corp with substantial liquid assets, far in excess of the cos operating needs. I'm afraid of this tax (15%) on excess earnings over reasonable needs if the IRS determines tax avoidance.
So would declaring regular dividends be enough to avoid the tax, or should he buy real estate and if so should he amend his charter to include real estate investment /develoment as a regular function of his business?
Any ideas would be appreciated, thanks.

[jainen]

what he should do

>>should he buy real estate and if so should he amend his charter to include real estate investment /develoment as a regular function of his business?<<

That's definitely what he should do!

Now tell him that some guy on the internet says he doesn't need liquidity so he should put his money into real estate, and change his line of business while he is at it.

Don't forget to charge him $250 for that advice.

[OldJack]

Well... first, as you know but some here may not, the tax is a tax on each years earnings that are accumulated beyond the limit allowable and is only if assessed by an IRS audit. So you would only be subject to possible tax on the earnings of the open 3 years. Second, as long as the corporation has legit "plans" for the use of the accumulation for such things as building/buying a building for the corporation there is no problem accumulated more than the allowed safe amount. There is the old "Bardal Formula" that as far as I know still exists for consideration. As I recall it is to justify operating cost needs. Its been quite a few years since I was concerned with this tax.

As to purchasing additional real estate, that doesn't actually reduce accumulated earnings & profits as it is only a transaction between the asset cash and the asset property. The only things that reduces accumulated earnings account (retain earnings) are losses or taxable dividends. However, in the "plan" justification is not the building itself that justifies the accumulation, it is really the idea that working capital is needed and building a building would reduce working capital, therefore the accumulation is needed. Once you have built the building you are back worrying about the accumulated earnings tax as your retained earnings account is still over the safe limit.

As to dividends.... why not as currently they are favored with a maximum 15% tax rate. Your client is most likely in a much higher tax rate. True, paying C-corp dividends do not give a tax deduction to the corp and results in double taxation but then you can't have everything.