Tax Analysts provides news, analysis, and commentary on accumulated earnings tax, also referred to as accumulated earnings and profits or accumulated E&P. While reg. section 1.312-6 addresses how to calculate corporate E&P, accumulated earnings is generally the amount of profits a corporation retains (after distributions to shareholders in the form of dividends are taken into account) netted over the life of the corporation.
Section 531 imposes a tax on some accumulated earnings. The statutory provision was designed to address the avoidance of double taxation by corporations that store up, rather than pay out, excessive amounts of cash – what’s considered by the IRS to be beyond the reasonable needs of the business – to prevent tax from being incurred at the shareholder level.
As lawmakers consider enacting tax reform that will increase the differential between the top corporate income tax rate and the top individual income tax rate, analysts have speculated that provisions like section 531 won’t be enough to counteract the income shifting abuse such a rate differential will generate.
The tax has been criticized as being hard to enforce, and the IRS’s limited assessment of it has been primarily aimed at closely-held corporations. One commentator has suggested ("How the Accumulated Earnings Tax Can Stimulate Growth") that Congress amend the statute to remove the exception that enables some corporations to hoard cash offshore without implicating section 531.
Accumulated E&P also plays a role in determining the extent to which a distribution is treated as a dividend under section 301 after all current E&P has been used up (see reg. section 1.316-2).