The Trump Tax reform lowers the corporate tax rate to 20%.
This blog discusses a second corporate tax that applies to a corporation that keeps money just to avoid paying a dividend.
If you want to brainstorm your tax planning using the Trump tax law, then give me, Brian Dooley, CPA, MBT a call at 949-939-3414. If your international tax accountant or CPA, needs help, have him or her call me.
Because corporate earnings are taxed a second time when they are distributed to shareholders (as a dividend), the small businesses may retain the profits to avoid this tax.
The tax law deals with this bias through the imposition of a tax on unnecessary accumulations of earnings. This tax is in addition to the regular corporate income tax.
“Unnecessary” is the key. This tax only applies if it is unnecessary for the business to retain the profits that it is accumulating.
The differential also induced shareholders to cause their companies to keep earnings as long as possible so that further earnings on those earnings would be taxed at the lower corporate rates.
To force a corporation to pay a dividend, the tax is charged on the accumulated taxable income at the top rate of tax on individuals.
In theory, the section 531 accumulated earnings tax is assessed if a company has allowed earnings to accumulate beyond its reasonable needs, the determination of the reasonable requirements of business.
The courts and the IRS have developed a variety of approaches to determining reasonable needs..
Despite this, the decision remains highly factual, subjective, and uncertain in the result.
Once accumulations are established beyond the reasonable requirements of the business, however, the issues become quite technical in computing the corporation’s accumulated taxable income and the accumulated earnings credit.
Although the tax law does not exempt publicly held companies from the tax, the legislative history expressly limits the application of this tax to privately owned corporations.
What You Can Do and Should Not Do
- Do not pay yourself a large salary. The new low 20% tax rate does not apply to wages, interest or rents.
- Do have a written plan on why you are not paying a dividend. To create this plan have a meeting of the corporate Board of Directors. Place in the plan in the minutes of the meeting.
- Do hire an attorney to draft the minutes.
- Do include a financial forecasts of the use of the accumulated profits.
- Do update this every six months. I understand that you will be paying your attorney. Remember, his fee is a tax deduction while paying tax on the dividend is not.
- Do hire your CPA to help draft the financial forecast. Update the forecast every six months.
 Section 531 called the accumulated earnings and profits tax