As of the end of 2021, RightCo Inc, a C corporation has accumulated E&P of $3,500,000.

The balance sheet shows, among other things, that RightCo has:

Cash of $1,000,000

Investment in a 51% owned subsidiary of $1,500,000

Accounts receivable of $2,000,000

Machinery and equipment of $500,000

Loans from bank due in 1 year $1,500,000

Rightco's machinery and equipment is old and needs to be replaced or upgraded, though the timing of this investment is uncertain. In addition RightCo has plans to purchase a new factory for $1,000,000 in the next two years. The Board has approved this future investment as part of its three-year strategic plan, though a specific date to start the project is not contained in the plan. RightCo's CFO estimates that it needs to retain $500,000 to cover fixed expenses during anticipated downturns in its business in the coming year. She also notes that she is unsure the loan can be refinanced, given RightCo's poor relationship with its current bank..

RightCo is projecting a loss of 1,000,000 in 2022 but profitable operations in 2023.

DESCRIBE THE RISK THAT THE ACCUMULATED EARNINGS TAX COULD APPLY TO RIGHTCO INC. WHAT WOULD YOU RECOMMEND RIGHTCO DO, IF ANYTHING, TO AVOID THE TAX?

Answer rating: 100% (QA)

The Accumulated Earnings Tax AET is a tax imposed by the IRS on C corporations that retain earnings instead of distributing them as dividends Its desi... View the full answer