accumulated earnings tax for good stocksaccumulated earnings tax can happen with abnormal return One thing all investors must be aware of is the accumulated earnings tax that the government places on companies. Companies that pay on depreciation, debt, assets or ANYTHING for the company that is NOT DIVIDENDS is considered to be retained earnings. The government will allow this tax free to a point however if the level of retained earnings goes to what is considered unreasonable levels an additional tax will be placed on the company and the shareholders when they could have just been paid a dividend. The idea behind this tax law is that companies won’t just be able to keep buying assets thus increasing stockholders equity and thereby increasing their net worth WITHOUT any tax penalty. If this tax law wasn’t there companies would simply increase their stockholders net worth and nobody would have to pay any taxes until the stockholders sold their stock for profit to another investor. Comments: penny stocksinvestment brokersThere are some things to think about when it comes to a company that you are investing in based on this tax law. The first thing to remember is that this law isn’t really damaging the company any more than if they just paid dividends, however, the company should NEVER be discouraged from investing its earnings or paying off necessary debt JUST based on the tax law. If the company has to pay a little more in taxes BUT in return gets to pay off a huge debt that is accumulating interest it very well might be worth it despite the accumulated earnings tax. Companies that are smart tend to PAY a dividend though as this avoids this tax problem and shows that the company has prestige and abundance in the market. It stands to common sense that if a company that you own can pay you cash after everything that is an expense or depreciation is paid, then that company must be doing okay in the market. |