With the current economic situation and the Federal government having a shortfall with its budget we felt it necessary to inform you of a possible tax situation in your company.
The Internal Revenue Service (“IRS”) will be looking at ways to get more money into the Federal coffers. The IRS may once again look at items they have not looked at in quite a while.
Have you heard that phrase before? If so, you are probably not alone. The intent of this letter is to inform you about your Company possibly being subjected to the “Accumulated Earnings Tax” (“AET”).
What is AET?
It is a tax assessed on the accumulated earnings (retained earnings) of certain corporations. The AET can be imposed on all corporations except: “S” crporations, Personal holding companies, Tax-exempt organizations, Passive foreign investment companies and Foreign personal holding companies.
Who assesses AET?
The AET is assessed by the Internal Revenue Service, (“IRS”). AET is not a self-assessed tax.
What tax rate is used for calculating AET?
Currently the rate used for calculating AET is the highest individual rate, which is 39.6%. This tax is in addition to the maximum corporate tax rate of 34% or 35%. When these rates are combined, a company would be subject to a rate of approximately 75% on the Federal return.
Can AET be avoided? If so, how?
Yes AET can be avoided through proper planning for the use of the accumulation. There are various strategies available to protect the income accumulated by the company. However, each company needs to be looked at individually. There is not a particular strategy that fits every company.
For tax year 2001 the IRS will be selecting their normal audits through their routine selection process. In addition to the normal audits the IRS will randomly select 50,000 returns for compliance audits.
If your company has Retained Earnings please call and let’s set up a time for discussion and planning.
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