If your business is doing well and you’ve got a nice pile of cash sitting in the bank, that’s a win… right?
Not always, according to the IRS.
There’s a sneaky little penalty called the Accumulated Earnings Tax. It’s their way of saying, “Congrats on the profits… but if you don’t do something with that money, we’re taking 20%.”
What the IRS Thinks You Are Doing
If you’re running a C-Corp and keep more than $250,000 in retained earnings (or $150,000 if you’re a personal service corp – looking at you, lawyers and consultants), the IRS assumes you’re trying to dodge personal taxes by not paying yourself.
Their logic? If you’re not reinvesting the cash or distributing it to shareholders, you’re hoarding. Like a squirrel. A suspicious squirrel.
And if they think you’re stashing away profits without a valid reason? That’s when the 20% penalty shows up.
What Counts as a Valid Reason?
You don’t have to spend it just to spend it. But you do need a plan.
The IRS wants to see clear intentions:
- Expansion
- Equipment purchases
- New hires
- R&D
- Launching new services
In other words, show them you’re building something.
Sloppy books and “we just felt like saving” won’t cut it. And here’s the kicker: this isn’t a one-time review. They can go back multiple years and hit you with this penalty retroactively.
So, What Now?
If you are holding onto cash in your C-Corp, we are not saying it’s wrong. We’re saying you better have the paperwork to back it up, or a strategy to use it smartly.
Sometimes the right move is reinvesting. Other times, it’s pulling some of it out and taking the personal tax hit. Either way, we help you plan it out before the IRS shows up with questions and a penalty sheet.
Let’s Lock It Down
We’ve seen how this plays out, and we know how to get ahead of it. The IRS doesn’t hate your success. They just want a cut of it.
If you want to make sure your retained earnings don’t turn into a target, book a consultation.
We’ll take a look at your setup and help you keep profits working for you… not against you.
