Question

23. Mr. Wilson incorporated his bookstore, Occult Books Unlimited, five years ago. Accumulated earning are $230,000, current earnings 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

If a corporation accumulates earnings that exceed the exemption amounts (i.e. $ 250000) an accumulated earnings tax of 20% of the excess earnings may be assessed.

Here , the need for $ 150000 for inventory is not allowed for deduction.

So, Accumulated earnings credit = $ 250000 ( basic Exemption ) - $ 230000 (accumulated earnings) = $ 20000 .

Accumulated Taxable Income = $ 80000 ( current earnings) - $ 20000 (accumulated earnings credit) = $ 60000

And tax amount = $ 60000 (accumulated taxable income) * 20 % = $ 12000.