Retained Earnings

[L. T. Portella]

Where can I find the IRS rules for how much Retained Earnings can a company
have without having to pay dividends? Thank you

 

[Bob]

Where can I find the IRS rules for how much Retained Earnings can a company
have without having to pay dividends? Thank you

I don't think there are regulations like that, only those dealing with a
majority owner and salaries but ask in news:misc.taxes.moderated

 

[Wayne Brasch]

Where can I find the IRS rules for how much Retained Earnings can a company
have without having to pay dividends? Thank you

I believe what you have reference to is the fact that when a corporation has
Retained Earnings in excess of $250,000, they may be asked by IRS to prove
why they need this much. If they can't do this to the satisfaction of IRS,
they may be charged what amounts to an additional tax for accumulating too
much. If the business can prove they have plans for expansion (such as
building new facilities or making major equipment purchases), they may
escape this additional amount.

Wayne Brasch, CPA, M. S. Taxation

 

[Sarah Berel-Harrop]

I don't think there are regulations like that, only those dealing with a
majority owner and salaries but ask in

there is an accumulated earnings tax, searching on
www.irs.gov with those keywords may help the
original poster.

 

[David Jensen]

there is an accumulated earnings tax, searching on
www.irs.gov with those keywords may help the
original poster.

Isn't that a dead letter? If MSFT could collect its kitty without paying
that tax, I have no idea who might be hit with it.

 

[Allan Martin]

Do a search on the Bardahl Formula or check out the site below.


http://www.1120accountant.com/retained-earnings.htm

 

[Sarah Berel-Harrop]

Isn't that a dead letter? If MSFT could collect its kitty without paying
that tax, I have no idea who might be hit with it.

Oh, dear. I got a little confused there, for a minute,
seeing you here. I came over here for a *respite* from
the howler monkey house. Well, hello, and welcome
to alt.accounting!

& here is a pointer to what I was thinking of:
http://www.irs.gov/publications/p542/ar02.html#d0e2914

Since I do financial, not tax, I don't really know who
gets hit with it or how the IRS determines what the
reasonable business needs are. I can say that when
I was working with a revenue agent on an audit,
about 1995, we were asked to justify our accumulated
earnings. (We had to keep the $ in order to support
our bonding line, and it wasn't a problem. We were
*also* asked to justify our officers' salary. This was
a construction co ~ 30 MM annual revenues). What
is MFST, I am unfamiliar with that?

Incidentally, (for the original poster), accumulated
earnings is not the same as retained earnings. I
remember calculating this for a corporate tax class,
and a textbook or the appropriate IRS form will
help you there. I cannot remember the details.

--
I'm standing on the outside of your shelter,
Lookin' in,
While the bombs are here a-droppin'
everywhere ...
Have I ever told you that I care?
(Shel Silverstein)

 

[David Jensen]

Oh, dear. I got a little confused there, for a minute,
seeing you here. I came over here for a *respite* from
the howler monkey house. Well, hello, and welcome
to alt.accounting!

Well, I have been teaching some accounting classes for a couple of
years, so I thought I'd drop in to see what's going on here.

& here is a pointer to what I was thinking of:
http://www.irs.gov/publications/p542/ar02.html#d0e2914

It doesn't look as if there is much change in that law since I had to
last look at it. The question comes in application of the law.

Since I do financial, not tax, I don't really know who
gets hit with it or how the IRS determines what the
reasonable business needs are. I can say that when
I was working with a revenue agent on an audit,
about 1995, we were asked to justify our accumulated
earnings. (We had to keep the $ in order to support
our bonding line, and it wasn't a problem. We were
*also* asked to justify our officers' salary. This was
a construction co ~ 30 MM annual revenues). What
is MFST, I am unfamiliar with that?

MSFT - Microsoft. It has historically had a very large cash pile.
<http://www.sec.gov/Archives/edgar/data/789019/000119312503045632/d10k.htm>
tells us that things haven't changed much:

Year Ended June 30

1999 2000 2001(2) 2002(3) 2003(4)

Revenue
$ 19,747 $ 22,956 $ 25,296 $ 28,365 $ 32,187
Operating income
10,010 11,006 11,720 11,910 13,217
Income before accounting change
7,785 9,421 7,721 7,829 9,993
Net income
7,785 9,421 7,346 7,829 9,993
Diluted earnings per share before accounting change(1)
0.71 0.85 0.69 0.70 0.92
Diluted earnings per share(1)
0.71 0.85 0.66 0.70 0.92
Cash dividends per share
– – – – 0.08
Cash and short-term investments
17,236 23,798 31,600 38,652 49,048
Total assets
38,321 51,694 58,830 67,646 79,571
Stockholders’ equity
28,438 41,368 47,289 52,180 61,020

 

[Sarah Berel-Harrop]

Well, I have been teaching some accounting classes for a couple of
years, so I thought I'd drop in to see what's going on here.

Well, too cool. What do you teach? I applied to a
PhD progam locally last year and did not get in. I
plan to try again &/or look for a position at a community
college. However, I am staying where I am right now,
because there are some things my company may be
doing that I would like to be involved in.

It doesn't look as if there is much change in that law since I had to
last look at it. The question comes in application of the law.

Yeah, I got the impression that the application would
be mostly to closely held businesses. This is not
because it can't be applied to companies with a lot
of shareholders. However, the purpose of the tax
is to provide a penalty for tax avoidance schemes.
This is far, far easier to see in the case of a business
in which there are few owners or a control group
that stands to gain from avoiding paying the dividends.
When you get into a big public company with diffuse
ownership, I think it gets a bit sticky to try to say, well,
your dividend policy is being set in order to help the
multiple joe bloes who own your stock avoid taxes.
I suspect, that the IRS would want to stick to clear-
cut cases.

I went and found the relevant part of the code on
FindLaw:

http://makeashorterlink.com/?C10121EC6
http://caselaw.lp.findlaw.com/casecode/uscodes/26/subtitles/a/chapters/1/sub
chapters/g/toc.html

But now I think about it, did the Congress actually
enact the law eliminating the "double taxation" of
dividends? I have to wonder how that would interact
with the AET, the intent of which is to force the
payment and taxation of dividends.

MSFT - Microsoft. It has historically had a very large cash pile.

d'oh. I normally see it referred to here as M$.

They need it to fund a predatory pricing scheme that
will enable them to take a monopoly position over
the entire internet. And the communications industry.
That's a reasonable business need, isn't it?

tells us that things haven't changed much:

Year Ended June 30

1999 2000 2001(2) 2002(3) 2003(4)

Revenue
$ 19,747 $ 22,956 $ 25,296 $ 28,365 $ 32,187
Operating income
10,010 11,006 11,720 11,910 13,217
Income before accounting change
7,785 9,421 7,721 7,829 9,993
Net income
7,785 9,421 7,346 7,829 9,993
Diluted earnings per share before accounting change(1)
0.71 0.85 0.69 0.70 0.92
Diluted earnings per share(1)
0.71 0.85 0.66 0.70 0.92
Cash dividends per share
- - - - 0.08
Cash and short-term investments
17,236 23,798 31,600 38,652 49,048
Total assets
38,321 51,694 58,830 67,646 79,571
Stockholders' equity
28,438 41,368 47,289 52,180 61,020

--
I'm standing on the outside of your shelter,
Lookin' in,
While the bombs are here a-droppin'
everywhere ...
Have I ever told you that I care?
(Shel Silverstein)

 

[David Jensen]

Well, too cool. What do you teach?

I'm teaching as an adjunct -- whatever needs to be taught. I'm avoiding
grading Intro finals right now.

I applied to a
PhD progam locally last year and did not get in. I
plan to try again &/or look for a position at a community
college.

Good luck.

However, I am staying where I am right now,
because there are some things my company may be
doing that I would like to be involved in.


Yeah, I got the impression that the application would
be mostly to closely held businesses. This is not
because it can't be applied to companies with a lot
of shareholders. However, the purpose of the tax
is to provide a penalty for tax avoidance schemes.

Which is strange, since most closely held companies could be taxed as
sub-S for little change in taxes paid and get rid of all double
taxation.

This is far, far easier to see in the case of a business
in which there are few owners or a control group
that stands to gain from avoiding paying the dividends.
When you get into a big public company with diffuse
ownership, I think it gets a bit sticky to try to say, well,
your dividend policy is being set in order to help the
multiple joe bloes who own your stock avoid taxes.

Unless there is a small controlling group such as Gates and Allen who
are trying to avoid personal taxes.

I suspect, that the IRS would want to stick to clear-
cut cases.

And ones with fewer expensive lawyers.

I went and found the relevant part of the code on
FindLaw:

http://makeashorterlink.com/?C10121EC6
http://caselaw.lp.findlaw.com/casecode/uscodes/26/subtitles/a/chapters/1/sub
chapters/g/toc.html

But now I think about it, did the Congress actually
enact the law eliminating the "double taxation" of
dividends? I have to wonder how that would interact
with the AET, the intent of which is to force the
payment and taxation of dividends.

Let's not forget the AMT which may also interact with this. I don't
recall the results of the most recent changes, but many, like the new
Medicare bill, make promises for the future and do nothing today.

d'oh. I normally see it referred to here as M$.

They need it to fund a predatory pricing scheme that
will enable them to take a monopoly position over
the entire internet. And the communications industry.
That's a reasonable business need, isn't it?

Certainly in their minds.

 

[Allan Martin]

Do a search on Bardalh Formula. This is formula is used to determine if
there are excess Retained Earnings.