Avoiding the Accumulated Earnings Tax

Corporations are subject to accumulated earnings taxes. A corporation is allowed to accumulate enough money to handle reasonable debts, operating expenses, etc. If a corporation accumulates too much, it must pay out money in salaries or dividends. If the corporation still has accumulated earnings, it must pay an accumulated earnings tax. Most small corporations do not like to pay dividends because it represents double taxation.

The cash values in a corporate-owned life insurance plan, which insures the lives of key corporate officers and employees, represent a reserve that is not subject to the accumulated earnings tax. Consequently, many corporations keep a lot of money on reserve in cash value life insurance policies. This is one of the reason that corporate-owned life insurance is extremely popular today.