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IRS Penality against Retained Earnings


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hi all,


I have heard that the IRS frowns on corporations that keeps too much retained earnings. For a small (S?) corporation a reasonable amount is $150k after which the government will charge a tax on retained earnings.  What about public corporations?  I am particularly concerned about some of my microcaps which have zero debt and are piling up retained earnings.  I wonder if they are forced eventually to distribute it due to the IRS rule.



Can anyone conform or shed light on either case?



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I don't think the Accumulated Earnings Tax applies to subchapter S corporations or any other pass through vehicle.  It also doesn't really apply to publicly traded companies in practice.  Private or controlled C corporations have to be meticulous about justifying the need for a cash cushion for a possible economic downturn, future expansion plans, etc etc.. in the board meeting minutes in case the IRS ever comes to examine them.


"publicly held corporations are essentially exempted from the AET as a practical matter, since it is very difficult to establish a tax-avoidance purpose in the case of a widely-held operating company when no individual or small group of individuals typically has legal or effective control of the company so as to demonstrate that the corporation is being "formed or availed of" for the forbidden tax-avoidance purpose."


full disclosure - not a tax professional


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It's been a long time since this came up, but if I remember, all you have to do is show that you need the money in the corporation for working capital, a big project, new building etc.  It doesn't apply to S corps and only to C corps.  Was put in to keep companies from accumulating cash at a lower tax rate  and avoiding the double tax.

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