[barelystayingsane]

Becker keeps bringing up these questions about the AET, asking what the max amount of taxable income would be if the taxpayer only took the minimum accumulated earnings credit. I had assumed the minimum credit would be $0 (the $250,000 credit less $250,000 beginning excess), and the maximum credit would be $250,000, but Becker is saying that the minimum credit is $250,000. Anybody know if this is how it’s worded on the actual exam?

[SeattleAccountant]

Haha, I sense confusion in this one. Yes, the correct wording associated with 250K credit is indeed “minimum” 🙂

Hopefully, the explanation below will make sense.

Recall that AET credit is the GREATER of the following two amounts:

1.$250,000 (or $150,000 for personal service corporations) less the amount of accumulated earnings and profits at the end of last tax year; or

2.The amount of current year earnings and profits that are retained for reasonable business needs in excess of dividends paid to the shareholders, less the net capital gains deducted in calculating accumulated taxable income.

Accordingly, the 250K credit is the minimum amount that is corp is going to get credit for to apply against first 250K in accumulated income no matter if it has or don't have legitimate reasons for hoarding the capital.

Now, you might ask what is the max then?! The max would be any amount (combined with the amount over first 250K) that was justifiably accumulated for the needs. So, it goes like this: say regular corp accumulated 1million of earnings. Out of that amount, the first 250K is the min credit = excused, after that extra credit is given for the legitimate needs. Lets say those needs amount to $750K, then the max credit is $750K.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[SeattleAccountant]

Haha, I sense confusion in this one. Yes, the correct wording associated with 250K credit is indeed “minimum” 🙂

Hopefully, the explanation below will make sense.

Recall that AET credit is the GREATER of the following two amounts:

1.$250,000 (or $150,000 for personal service corporations) less the amount of accumulated earnings and profits at the end of last tax year; or

2.The amount of current year earnings and profits that are retained for reasonable business needs in excess of dividends paid to the shareholders, less the net capital gains deducted in calculating accumulated taxable income.

Accordingly, the 250K credit is the minimum amount that is corp is going to get credit for to apply against first 250K in accumulated income no matter if it has or don't have legitimate reasons for hoarding the capital.

Now, you might ask what is the max then?! The max would be any amount (combined with the amount over first 250K) that was justifiably accumulated for the needs. So, it goes like this: say regular corp accumulated 1million of earnings. Out of that amount, the first 250K is the min credit = excused, after that extra credit is given for the legitimate needs. Lets say those needs amount to $750K, then the max credit is $750K.

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[barelystayingsane]

Wow, that's completely different from how Becker explained it. Becker has the credit equaling $250,000 less the excess of E&P at the beginning of the year over corporate needs for the year. Sounds like they just mashed the two up together. Thanks for all your help, SeattleAccountant! Maybe you should be writing the Becker books. You do a much better job of explaining these things.

[barelystayingsane]

Wow, that's completely different from how Becker explained it. Becker has the credit equaling $250,000 less the excess of E&P at the beginning of the year over corporate needs for the year. Sounds like they just mashed the two up together. Thanks for all your help, SeattleAccountant! Maybe you should be writing the Becker books. You do a much better job of explaining these things.

[barelystayingsane]

So I looked online for some additional clarification, and I found about five different ways to calculate AET. My old corporate tax textbook said the credit was the greater of the minimum credit ($250,000) less accumulated E&P at the beginning of the year, or the reasonable needs of the business less accumulated E&P at the beginning of the year (in other words, current E&P needed for the reasonable needs, like SeattleAccountant said). Both SeattleAccountant and my corporate tax textbook mentioned subtracting LT capital gains, net of tax, but Becker says to subtract all capital losses. Do you just subtract everything capital-related?

[barelystayingsane]

So I looked online for some additional clarification, and I found about five different ways to calculate AET. My old corporate tax textbook said the credit was the greater of the minimum credit ($250,000) less accumulated E&P at the beginning of the year, or the reasonable needs of the business less accumulated E&P at the beginning of the year (in other words, current E&P needed for the reasonable needs, like SeattleAccountant said). Both SeattleAccountant and my corporate tax textbook mentioned subtracting LT capital gains, net of tax, but Becker says to subtract all capital losses. Do you just subtract everything capital-related?

[rjcpa]

From Wiley you need:

+ Dividend Rec. Decuction

+ NOL Deduction

– Fed and Foreign inc taxes

– Excess Charitable cont over 10%

– Net Capital loss

– Net LTCG over net STCL

Then subtract your credit (the lesser of 250,000 (150,000 for Personal serv co.) or resonable needs of the business.

Then subtract your dividends

Then multiply the remainder by 15%

That is the AET

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[rjcpa]

From Wiley you need:

+ Dividend Rec. Decuction

+ NOL Deduction

– Fed and Foreign inc taxes

– Excess Charitable cont over 10%

– Net Capital loss

– Net LTCG over net STCL

Then subtract your credit (the lesser of 250,000 (150,000 for Personal serv co.) or resonable needs of the business.

Then subtract your dividends

Then multiply the remainder by 15%

That is the AET

FAR - 10/3/12 - 86
BEC - 11/27/12 - 70 1/14/13 - 81
AUD - 4/4/13 - 87
REG - 7/8/13 - 80

[SeattleAccountant]

@mattz,

I've noticed moderate amount of unexplained/review on your own/mashed together stuff in Becker. I guess, no review is perfect but it did make my review at times miserable. At any rate, for those capital issues, it is probably safe/safer to net them and subtract all.

Bwt, I think you'll do great comes the test day! This is based on types of questions you are asking that show thoughtfulness and invested time.

@rjcpa

Willey says “lesser of ..”?! Hehe, interesting.

Here is a snip from my research/REG prep to reiterate the issue once again.

“The amount by which the minimum credit allowable to the corporation exceeds the accumulated E & P of the corporation at the close of the preceding tax year. Most corporations are allowed a minimum credit of $250,000 against accumulated taxable income, even when earnings are accumulating beyond reasonable business needs. However, certain personal service corporations in health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting are limited to a $150,000 accumulated earnings credit. Moreover, a nonservice corporation (other than a holding or investment company) may retain MORE THAN $250,000 ($150,000 for a service organization) of accumulated earnings if the company can justify the accumulation as necessary to meet the reasonable needs of the business.”

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[SeattleAccountant]

@mattz,

I've noticed moderate amount of unexplained/review on your own/mashed together stuff in Becker. I guess, no review is perfect but it did make my review at times miserable. At any rate, for those capital issues, it is probably safe/safer to net them and subtract all.

Bwt, I think you'll do great comes the test day! This is based on types of questions you are asking that show thoughtfulness and invested time.

@rjcpa

Willey says “lesser of ..”?! Hehe, interesting.

Here is a snip from my research/REG prep to reiterate the issue once again.

“The amount by which the minimum credit allowable to the corporation exceeds the accumulated E & P of the corporation at the close of the preceding tax year. Most corporations are allowed a minimum credit of $250,000 against accumulated taxable income, even when earnings are accumulating beyond reasonable business needs. However, certain personal service corporations in health, law, engineering, architecture, accounting, actuarial science, performing arts, and consulting are limited to a $150,000 accumulated earnings credit. Moreover, a nonservice corporation (other than a holding or investment company) may retain MORE THAN $250,000 ($150,000 for a service organization) of accumulated earnings if the company can justify the accumulation as necessary to meet the reasonable needs of the business.”

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[Anonymous]

I'm a little late on the post but I think this link summarizes AET pretty well

https://www.legalmatch.com/law-library/article/corporate-accumulated-earnings-tax.html

[Anonymous]

I'm a little late on the post but I think this link summarizes AET pretty well

https://www.legalmatch.com/law-library/article/corporate-accumulated-earnings-tax.html

[Priscilla]

Thanks for that “link” really simple and good explanation on AET

AUD - Done
REG - Done
BEC - Done
FAR - August 2015

[Priscilla]

Thanks for that “link” really simple and good explanation on AET

AUD - Done
REG - Done
BEC - Done
FAR - August 2015

[Anonymous]

You guys are awesome, I have learned more in the past 30 minutes. Thank you for the article and some of the explanations.

Hiya to all…

[Author]

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