C Corp Accumulated Earnings Tax (AET): why it’s back in 2024–2025—and how to defend retained earnings

1) What AET is (and what it is not)

AET is not a replacement for corporate income tax—it’s a penalty tax. It applies when a corporation is “formed or availed of” to avoid shareholder tax by letting earnings accumulate instead of paying dividends. The tax is computed annually on “accumulated taxable income,” not GAAP retained earnings and not E&P. :contentReference[oaicite:2]{index=2}

2) The statutory architecture: §§531–537 in plain English

The core structure is: §531 imposes the tax, §532 defines who is subject, §533 creates a presumption of avoidance when accumulations exceed reasonable needs, §534 provides a mechanism to shift the burden to the IRS with a detailed statement, and §535 provides an accumulated earnings credit (a limited “safe harbor”). §537 defines “reasonable needs” and demands specific, definite, feasible plans for anticipated needs. :contentReference[oaicite:4]{index=4}

3) The accumulated earnings credit: the “safe harbor” that hasn’t kept up

The minimum credit is $250,000 for most corporations (reduced to $150,000 for certain personal service corporations). The report emphasizes the strategic reality: the credit isn’t indexed for inflation, so more businesses hit “AET territory” earlier in their lifecycle than Congress likely intended—making the reasonable-needs defense routine, not exceptional. :contentReference[oaicite:5]{index=5}

4) “Reasonable needs” defense: specific, definite, and feasible plans

The key qualitative defense is “reasonably anticipated needs,” but it requires more than a vibe. The standard is specific, definite, and feasible— shown through budgets, contracts, minutes, permitting steps, active negotiations, and a real timeline. The report’s case discussion highlights how “contingency” narratives can fail when they aren’t quantified and documented contemporaneously. :contentReference[oaicite:6]{index=6}

5) Bardahl formula: the quantitative working-capital defense

Bardahl working-capital analysis estimates how much cash a business needs to fund one operating cycle: inventory days + receivable days − payable days, applied to annual cash operating costs. The report emphasizes the most litigated choice: “average cycle” (IRS-favored) vs “peak cycle” (taxpayer-favored), especially for seasonal businesses where survivability is determined by the busiest month, not the average month. :contentReference[oaicite:9]{index=9}

6) IRS scrutiny: what triggers attention in 2024–2025

The report describes a modern enforcement posture: analytics-driven selection, examiners trained to “vertical analyze” Form 1120 balance sheets, and recurring red flags like growing cash, zero dividends, and shareholder loans. AET often appears as a collateral issue in broader audits involving related-party transactions or compensation disputes. :contentReference[oaicite:11]{index=11}

7) Dividend timing tool: §563 “top-up” dividends by March 15

AET has a unique timing release valve: dividends paid within 2 months and 15 days after year-end can be treated as paid during the prior tax year for AET purposes. Practically, corporations can run their Bardahl and “reasonable needs” work in February, then pay a targeted dividend by March 15 to eliminate excess accumulations for the prior year. :contentReference[oaicite:12]{index=12}

8) Modern context: Moore (2024), OBBBA (2025), and CAMT interactions

The report highlights three “why now” drivers: (1) Moore v. United States (2024) reinforced Congress’s power to tax undistributed earnings in certain structures, strengthening the conceptual footing of anti-deferral regimes; (2) OBBBA (July 4, 2025) changed taxable income dynamics (including expensing); and (3) CAMT creates a separate tax floor for certain large corporations, which can indirectly reduce AET base via higher federal taxes—but only where CAMT applies. :contentReference[oaicite:13]{index=13}

9) A 2025 defense playbook: minutes + models + hygiene