During a recent IRS audit,the revenue agent decided that Roger used his closely-held corporation,Dodger Inc.,to avoid shareholder tax by accumulating earnings beyond the reasonable needs of the business.Dodger's taxable income for the year was $500,000 and it paid no dividends.Compute Dodger's accumulated earnings tax,assuming that it had accumulated $130,000 after-tax income in prior years.
A)$0
B)$100,000
C)$76,000
D)$50,000

Question

Quizplus · Accepted Answer

The accumulated earnings tax is imposed on corporations that accumulate earnings beyond the reasonable needs of the business to avoid shareholder taxes. The tax rate is 20%. The reasonable accumulation is $250,000 for most corporations. Dodger's taxable income is $500,000, and it has $130,000 accumulated from prior years. The excess accumulation is $500,000 - $250,000 = $250,000. The tax is 20% of $250,000, which is $50,000. However, since the corporation has $130,000 accumulated from prior years, the taxable amount is $250,000 - $130,000 = $120,000. The tax is 20% of $120,000, which is $24,000. Therefore, the accumulated earnings tax is $24,000.

During a Recent IRS Audit,the Revenue Agent Decided That Roger