Is the low corporate tax rate triggering more accumulated-earnings-tax audits?
It appears to be the case, tax pros say, noticing an uptick in these exams. The 2017 tax reform law lowered the C corporation tax rate to 21%. This low rate, when compared with the 37% top individual rate, makes C corp status beneficial, especially for firms that retain earnings rather than pay dividends to their owners.
The accumulated earnings tax is 20% of earnings accumulated in excess of the larger of $250,000 or accumulations needed for reasonable business needs, such as growth of the firm, debt retirement, shoring up the firm’s pension plan or covering the loss of a principal customer. The minimum accumulation for service corporations is $150,000. Firms with excess accumulated earnings and a history of not paying dividends, or paying small dividends, could face heat.
Be sure to document the business purpose for accumulating earnings. Include a description of plans and decision-making processes in corporate minutes and budget forecasting documents, to the extent that significant funds are set aside.
A charity’s officer who gives online seminars isn’t an independent contractor. He or she fully controls the courses and is the only teacher. This is the group’s sole activity. The organization issued the founder a 1099 and treated him as a contractor. He or she is a statutory employee because he is an officer and his services were the sole source of the group’s income (The Redi Foundation, TC Memo. 2022-34).
Expenses incurred before beginning business aren’t deductible right away, the Tax Court says in the case of a corporate consultant who was a full-time employee and was also in the early stages of opening her own company. She networked and participated in speaking engagements to build up clientele and her brand, she worked with a firm to set up her website, and she reported $400 in gross receipts. But that’s not enough. Her initial research and solicitation of potential customers don’t rise to the level of carrying on a business (Harrison, TC Summ. Op. 2022-6).