Accumulated Earnings Tax

DEFINITION of 'Accumulated Earnings Tax'

A tax imposed by the federal government upon companies with retained earnings deemed to be unreasonable and in excess of what is considered ordinary.

BREAKING DOWN 'Accumulated Earnings Tax'

The federal government produced this tax to deter investors from negatively influencing a company's decision to pay dividends. Essentially, this tax persuades companies to issue dividends, rather than retaining the earnings.

The premise behind this tax is that companies that retain earnings typically experience higher stock price appreciation. Although this is beneficial to stockholders, as capital gains taxes are lower than dividend taxes, it is detrimental to the government because tax revenues decrease. By adding an extra tax upon a firm's retained earnings, the taxman will either collect more taxes from the company or persuade them to issue dividends, thereby allowing the government to collect from the stockholders.

RELATED TERMS
  1. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  2. Taxes

    An involuntary fee levied on corporations or individuals that ...
  3. Direct Tax

    A tax that is paid directly by an individual or organization ...
  4. Retained Earnings

    Retained earnings is the percentage of net earnings not paid ...
  5. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  6. Tax Base

    The assessed value of a set of assets, investments or income ...
Related Articles
  1. Personal Finance

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  2. Markets

    3 Tax Implications of Dividend Stocks

    Dividend paying companies are attractive in a low interest rate environment, but income seeking investors have to be careful of the potential tax hit.
  3. Personal Finance

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  4. Financial Advisor

    How to Plan for Taxes on Dividends

    Dividends are taxed differently than other investment income. Here are some strategies to help lower taxes on dividends.
  5. Personal Finance

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  6. Personal Finance

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Managing Wealth

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  8. Investing

    Evaluating Retained Earnings: What Gets Kept Counts

    A company's retained earnings matter. Be investment-savvy and learn how to analyze this often overlooked information.
  9. Personal Finance

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  10. Personal Finance

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
RELATED FAQS
  1. What is the difference between income tax and capital gains tax?

  2. Is dividend income taxable?

  3. How do you calculate retained earnings per share?

    Research the amount of retained earnings per share compared over time to understand whether or not a company uses its profits ... Read Answer >>
  4. How are retained earnings related to a company's income statement?

    Understand what a company's statement of retained earnings represents and how it is related to a company's other financial ... Read Answer >>
  5. Which transactions affect the retained earnings statement?

    Retained earnings are the portion of a company's income that management retains for internal operations instead of paying ... Read Answer >>
  6. What does total stockholders equity represent?

    Understand the equation for total stockholders' equity and what it represents. Learn the components of stockholders' equity ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center