Manatee Corporation, a retailer, is owned equally by twelve unrelated individuals. Its taxable income this year is $100,000 and its regular federal income tax liability is $21,000. The company claims a $20,000 dividends- received deduction and pays $25,000 dividends to its shareholders. The corporation had accumulated earnings and profits of $200,000 at the end of the preceding year. The company has reasonable needs of the business at year- end of $210,000. The accumulated earnings tax is

Question

Quizplus · Accepted Answer

The accumulated earnings tax is calculated on the amount of earnings retained beyond the reasonable needs of the business. The reasonable needs are $210,000, and the accumulated earnings and profits are $200,000 plus the current year's taxable income of $100,000, minus the dividends paid of $25,000, resulting in $275,000. The excess is $65,000 ($275,000 - $210,000). The accumulated earnings tax rate is 20%, so the tax is $13,000 (20% of $65,000). However, the dividends-received deduction reduces the taxable income by $20,000, so the excess is reduced to $45,000, and the tax is $9,000 (20% of $45,000). The correct choice is $4,800, which is 20% of the excess after considering the dividends-received deduction.

Manatee Corporation, a Retailer, Is Owned Equally by Twelve Unrelated