Accumulated-Earnings Tax Law and Legal Definition

Accumulated-earnings tax refers to an additional tax or penalty tax on earnings that a business retains in an attempt to avoid the higher income taxes that the owners would be subject to if the earnings were paid as dividends. The purpose of imposing accumulated-earning tax is to minimize revenue losses caused by non-distribution of gains and profits by corporations attempting to shield their shareholders from the individual income tax. The accumulated earnings tax operates as a sanction to induce distribution of earnings and profits to shareholders so as to increase the latter's income taxes.

In the U.S., the federal government can impose an accumulated earnings tax equal to fifteen percent of the accumulated taxable income. [26 USCS § 531].