A corporations retained earnings are the portion of profits not distributed to shareholders as dividends. Over time, these retained earnings can accumulate. The IRS permits a corporation to retain excess earnings only for expansion or other necessary business reasons; however, if the corporation allows earnings to accumulate beyond reasonable business needs, it will be subject to an accumulated earnings tax (AET) penalty. According to your course text, this accumulated earnings tax is designed to encourage a corporation to distribute any excess profits so that shareholders will incur tax liabilities for dividends. Consider the following questions: What is the impact of AET on corporations? Should the government change its policies on excess retained earnings?

With these thoughts in mind:

Give an analysis of current policies on accumulated earnings tax penalties for corporations. Evaluate the impact of AET on corporations. Provide your opinion on whether or not the U.S. government should change its policies on excess retained earning penalties for larger corporations.