Question

ACCT TAX

Mr. Wilson Incorporated his bookstore, Occult Books Unlimited, five years ago. Accumulated earning are $230,000, current earning are $80,000, and he can show a need for $150,000 of inventory. What is the amount of accumulated taxable income? If the tax is paid, what are the accumulated earnings at the end of the current year?

Answer 1

Answer with explanation

Federal Government allows accumulation of earning up to $250,000. More than that will be taxable.

However, federal government allows accumulation of earning without any tax implication for any amount if there is "reasonable needs of business".

"IRS says the reasonable needs of a business are:

Specific, definite, and feasible plans for use of the earnings accumulation in the business.

The amount necessary to redeem the corporation's stock included in a deceased shareholder's gross estate, if the amount does not exceed the reasonably anticipated total estate and inheritance taxes and funeral and administration expenses incurred by the shareholder's estate."

Hence, in this case the need for inventory can be shown as reasonable need for business.

So the amount of accumulated taxable income-

= current year taxable income- (accumulated earning credit)

=$(80,000-20,000)=$60,000

Also,Accumulated earning credit is greater of-

a)$250,000 less accumulated earning till the previous year .i.e. $20,000(250,000-230,000)

b) Current year profit less the amount of profit retained for" reasonable business need" i.e $0(80,000-80,000*)

* As the requirement is $150,000, the amount will be limited to the current year profit.

As, the accumulated earning is not crossing the threshold limit for $250,000 hence the amount of accumulated taxable income is $0.

If the taxes are paid, accumulated earning= $(230,000+80,000)=$310,000