CPA Regulation (REG) : Accumulated Earnings Tax

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Accumulated Earnings Tax

Presto Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Presto has accumulated taxable income for Year 3. Which step(s) can Presto take to eliminate or reduce any Year 3 accumulated earnings tax?

I.  Demonstrate that the “reasonable needs” of its business require the retention of all or part of the Year 3 accumulated taxable income.

II. Pay dividends by April 15, Year 4.

Possible Answers:

Neither I or II

II only

I only

Both I and II

Correct answer:

Both I and II

Explanation:

To minimize the impact of the accumulated earnings tax, a corporation can argue on the basis of “reasonable needs” of business before the IRS, and provide a specific, definite, and feasible plan for the use of such retained earnings. Additionally, dividends paid by the corporate tax return deadline which reduce accumulated earnings will also reduce or eliminate the tax on those earnings.

Example Question #2 : Accumulated Earnings Tax

The accumulated earnings tax can be imposed:

Possible Answers:

On personal holding companies.

Only on S corporations.

On any entity with more than 100 shareholders.

Regardless of the number of stockholders in a corporation.

Correct answer:

Regardless of the number of stockholders in a corporation.

Explanation:

The accumulated earnings tax is directed primarily at regular C corporations. The number of shareholders is irrelevant. Personal holding companies and S corporations are exempt from this tax.

Example Question #3 : Accumulated Earnings Tax

The accumulated earnings tax is paid at which rate?

Possible Answers:

35%

20%

21%

15%

Correct answer:

20%

Explanation:

The rate for the accumulated earnings tax is the same as the rate individual taxpayers pay on dividends, or 20%. This is because the accumulated earnings tax is directed at regular corporations who hold an excess of retained earnings instead of being distributed as dividends to shareholders.

Example Question #4 : Accumulated Earnings Tax

When a Subchapter S corporation does not have any _________, the amount distributed to a shareholder will decrease that shareholder’s basis in the stock.

Possible Answers:

Tax exempt earnings and profits

Capital gains income

Dividend income

Accumulated earnings and profits

Correct answer:

Accumulated earnings and profits

Explanation:

When an S Corp does not have any accumulated E&P, the distribution to the shareholder will decrease its basis in the company stock.

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