Accumulated Earnings Tax (AET) Calculator 2026 (C-Corp)

Calculate your C-corporation 2026 Accumulated Earnings Tax under Internal Revenue Code Sections 531–537. The 20% penalty applies to accumulated taxable income beyond the reasonable needs of the business and the $250,000 / $150,000 (PSC) accumulated earnings credit. Free, private, runs entirely in your browser.

Corporation Type
PSC = health, law, engineering, architecture, accounting, actuarial, performing arts, consulting (Section 535(c)(2)(B)).
Retained earnings carried into the current year (after prior dividends).
Current-Year Income (per Section 535)
Form 1120 line 30 (regular taxable income).
21% × taxable income (rough). Subtracts from accumulated taxable income.
Cash + property dividends. Includes consent dividends + dividends-paid deduction (Section 561).
Carryover charitable contributions reducing accumulated taxable income.
Reasonable Business Needs (Section 537)
Operating cycle × cash needed. Justifiable retention under Bardahl Mfg. Corp. v. Commr.
Plant, real estate, equipment with definite plan + board minutes documentation.
Bona fide third-party debt scheduled for retirement (Section 537(a)(1)).
Identified risks (product liability, environmental). Vague "rainy day" funds are NOT reasonable.
Accumulated Earnings Tax (20%)
$0
Subject Income
$0
Accumulated Earnings Credit
$0
Risk Status
—
Section 531–537 Calculation Breakdown
Step Amount
Constructive dividend warning: If the IRS deems the corporation has accumulated earnings beyond its reasonable business needs and beyond the credit, it can also reclassify excessive shareholder loans, personal use of corporate assets, and below-market transactions as constructive dividends — taxable to shareholders without any wage offset to the corporation. AET is a self-assessed tax, but it is most often raised on audit.

Source: IRC §§ 531–537 — Accumulated Earnings Tax (Cornell LII) + IRS Publication 542 — Corporations. Last updated: May 3, 2026.
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What Is the Accumulated Earnings Tax (AET)?

The Accumulated Earnings Tax is a 20% federal penalty under Internal Revenue Code Sections 531–537 imposed on C-corporations that retain earnings beyond the reasonable needs of the business for the purpose of avoiding shareholder-level dividend tax. The tax is in addition to the regular 21% corporate income tax — meaning over-accumulated earnings can effectively be taxed at 41% at the entity level, then taxed again as dividends when finally distributed. AET applies only to C-corporations: S-corporations, partnerships, and personal holding companies (which face the separate Section 541 tax instead) are exempt. Source: IRC § 531.

AET is a self-assessed tax in theory, but it is almost always raised by an IRS examiner on audit when a closely held C-corporation has substantial liquid assets, low dividend history, and shareholders in high tax brackets. The IRS uses Section 533 — accumulated earnings beyond the reasonable needs of the business creates a presumption of tax-avoidance purpose, which the corporation must affirmatively rebut with contemporaneous documentation. Last updated: May 3, 2026.

The $250,000 / $150,000 Accumulated Earnings Credit (Section 535(c))

Every C-corporation gets a minimum accumulated earnings credit, regardless of business needs. For general C-corporations, the credit is $250,000 of accumulated earnings and profits — the corporation can sit on at least $250,000 of retained earnings without any AET exposure. For Personal Service Corporations (PSCs) — those whose principal activity is health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting — the credit drops to $150,000 under Section 535(c)(2)(B). The credit is cumulative, not annual: accumulated E&P at year-end is compared to the credit, not the current-year increase.

If reasonable business needs (Section 537 — working capital, expansion plans, debt retirement, self-insurance) exceed the minimum credit, the corporation can use the higher reasonable-needs amount instead. The credit is taken as the GREATER of the standard $250,000 / $150,000 OR the documented reasonable needs. This is why Bardahl-formula working capital, board-minute expansion plans, and contingency reserves matter so much — they expand the safe harbor above $250,000.

The Bardahl Formula and Reasonable Business Needs

Bardahl Manufacturing Corp. v. Commissioner (52 T.C. 884, 1969) established the Tax Court's working-capital methodology for AET cases. The Bardahl formula = (Operating Cycle as % of Year) × (Total Operating Costs). Operating Cycle = Average Inventory ÷ Annual Cost of Sales + Average Receivables ÷ Annual Sales − Average Payables ÷ Annual Cost of Sales. The result is the minimum cash needed to fund one operating cycle, which is reasonable to retain. Service businesses with no inventory often use a modified Bardahl with only the receivables turnover.

Reasonable needs also include: specific expansion plans (with board minutes, architects' drawings, financing letters — vague "we might expand someday" is NOT enough), retirement of bona fide third-party debt (Section 537(a)(1)), specific self-insurance reserves for identified risks (product liability, environmental remediation — generic "rainy day" funds fail), redemption of estate-related stock under Section 303, and reasonably anticipated needs for the next 12–24 months. The IRS gets very skeptical of "needs" beyond a 24-month horizon without exceptional documentation.

How the 20% Tax Is Calculated

Accumulated Taxable Income (ATI) = Taxable Income − Federal Income Tax − Charitable Contributions − Dividends Paid Deduction (Section 561) − Excess Section 535(c) deductions. Subject Income for AET = ATI − (Reasonable Needs Increase + Accumulated Earnings Credit unused). AET = 20% × Subject Income. The dividends-paid deduction includes regular dividends, consent dividends, and certain liquidating distributions. Strategic year-end dividend declarations within 2.5 months of year-end can be backdated to the prior year using Section 563(a) — a common AET-avoidance technique for corporations realizing they're at risk.

Beyond AET, the same accumulation pattern can trigger constructive dividend reclassification: shareholder loans without bona fide debt features, personal use of corporate vehicles or property, below-market sales to shareholders, and unreasonable compensation can all be recharacterized as taxable dividends. The combined exposure (20% AET + dividend-treated reclassifications + interest + accuracy-related penalties under Section 6662) makes AET cases among the most expensive C-corporation audits. Always document reasonable business needs contemporaneously and consider an annual reasonable-needs memo signed by the board.