Strategic Earnings Management: Understanding Accumulated Earnings Tax

ARTICLE | March 14, 2025

Authored by Vasquez + Company

The allure of operating a business as a C corporation has grown in light of the flat 21% corporate tax rate introduced by recent tax legislation. This development has many owners contemplating whether switching from a pass-through entity to a C corporation might be more tax-friendly. However, while the corporate structure does provide certain benefits, it is critical to understand potential pitfalls such as the Accumulated Earnings Tax (AET). This article provides a comprehensive overview of the AET, explaining how it arises, the circumstances that trigger it, and the strategies that can help minimize its impact. In addition, we will compare the AET with the Personal Holding Company (PHC) tax and highlight the role of dividends and stock redemptions in managing corporate earnings.

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Thoughtful planning can ensure your corporation retains the funds it legitimately needs without incurring unnecessary penalties. By taking a measured approach to managing accumulated earnings, you can protect your business from unexpected tax burdens and confidently pursue your long-term growth objectives.

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