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Stockpile company profits penalty-free

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in Small Business Tax,Small Business Tax Deduction Strategies

In the current economic climate, it’s a good idea for your company to save money for a rainy day. But you can run into serious tax trouble if you hoard too much cash in the corporate cupboard.

Strategy: Stay within the prescribed tax-law limits. Otherwise, your company could be socked with the “accumulated earnings tax.” This penalty tax is tacked onto the regular corporate income tax.

The accumulated earnings tax for 2009 is pegged to the tax rate for qualified dividends. However, in a few years the rate returns to the highest income tax rate for individuals—more than double the current rate! 

Here’s the whole story: Prior to 2003, dividends were taxed at ordinary income rates reaching as high as 39.6%. So high-income business owners had a powerful tax incentive to stockpile company profits and earnings instead of paying out dividends.

The accumulated earnings tax was designed to avoid excessive accumulations ...(register to read more)

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