RPC has EMP of $200,000 end of 2008.
Taxable income end of 2009 is
$1 million and the tax for the year is $340,000.
Non deductible charitable contribution of $10,000
dividends received is $25,000
Net Capital Gain is $40,000
Paid dividends to shareholders January 2009 is $50,000
Calculate the Accumulated Earnings Tax
To calculate the Accumulated Earnings Tax (AET), we need to follow a specific formula provided by the IRS. The AET is calculated based on the taxable income of the corporation, as well as certain adjustments and limitations. Below is the step-by-step process to calculate the Accumulated Earnings Tax:
Step 1: Calculate the Adjusted Net Income (ANI)
ANI = Taxable income - Non-deductible charitable contributions
In this case,
ANI = $1,000,000 - $10,000 = $990,000
Step 2: Calculate the Adjusted Taxable Income (ATI)
ATI = ANI - Net Capital Gain - Dividends Received
In this case,
ATI = $990,000 - $40,000 - $25,000 = $925,000
Step 3: Calculate the Accumulated Earnings Credit (AEC)
AEC = Greater of (50% of taxable income) or ($250,000)
In this case, since the taxable income is $1,000,000, which is greater than $250,000, the AEC would be 50% of the taxable income.
AEC = 50% of $1,000,000 = $500,000
Step 4: Calculate the Accumulated Earnings Deduction (AED)
AED = Paid dividends to shareholders - Greater of ($250,000) or (Earnings and Profits of the prior year)
In this case, the Paid dividends to shareholders is $50,000, and we need to determine the greater between $250,000 and the Earnings and Profits of the prior year.
Since the Earnings and Profits of the prior year are not given in the provided information, let's assume it is $200,000 (which is given as the ending EMP for 2008).
Comparing $250,000 and $200,000, the greater value is $250,000.
AED = $50,000 - $250,000 = -$200,000
Since the result is negative, the AED will be zero.
Step 5: Calculate the Accumulated Taxable Income (ATI) for AET Calculation
ATI for AET calculation = ATI - AEC - AED
In this case,
ATI for AET calculation = $925,000 - $500,000 - $0 = $425,000
Final Step: Calculate the Accumulated Earnings Tax (AET)
AET = 20% of ATI for AET calculation
In this case,
AET = 20% of $425,000 = $85,000
Therefore, the Accumulated Earnings Tax for this corporation would be $85,000.