DOES THIS CONCERN YOU? RETAINED EARNINGS AND TAXES in a C CORPORATION [Does This Concern You? Retained Earnings and Taxes in a C Corporation; is a tool for use with a client during an opening conversation.] Thank you for taking the time today to talk with me about your business and the concern many businesses have regarding retained earnings and taxes.

PROFITS YOUR FAMILY PRODUCTS AND SERVICES Income Benefits BUSINESS COSTS Business Value Let’s begin by taking a look at the big picture. In most business there are at least four key components that make it work and make it worth your while. Profits: The goal is to generate a profit, that is what most people strive for. Everything you do impacts the bottom line. Products and Services: This is what you are in business to provide, it’s your differentiation Business Costs: Every business has costs – controlling those costs, making sure that the money spent helps your bottom line is important to your future decision making Owners/Key People: The key element of your business is you and your co–owners and perhaps some key employees. You make your business go – your vision – your money. These components are only one part of the story. They make up your dynamic, energized entity. But why did you create a business in the first place? Although everyone’s motivation is different most people look to their business as an end to means to provide for their future and that of their family: Income – Your hard work and dedication makes the business work, and in return it provides you an income Benefits – Many look to leverage corporate dollars to provide additional benefits such as a retirement plan, insurances, and more Business Value – The value of the business itself is important for your ongoing success, and future succession. Personal - To be in control of your destiny and your success. As this movement of income, benefits and value builds it creates stability and protection for you and your family. OWNERS / KEY PEOPLE

Problems May Be Lurking PROFITS BUSINESS COSTS PRODUCTS AND SERVICES OWNERS / KEY PEOPLE With every business there are problems that may be lurking – problems that could have a major impact to your future success. Products and Services need to remain current which may require working capital Business Costs need to be controlled as you consider purchasing assets, retiring debt, or business expansion What would the impact be to your business if an owner or key person were to leave the company, die or become disabled All of these issues impact your company profits; there is another problem lurking - when you are successful you could be creating a Retained Earnings Issue! This is where we are going to focus our discussion.

Retained Earnings Percentage of net earnings retained by business and not paid out as dividend. May also be increased by other asset value increases. 1 Recorded under shareholders’ equity on the balance sheet. 2 What are Retained Earnings? It is a percentage of your net earnings not paid out as a dividend but retained by the company to be reinvested in its core business or to pay debts. In addition retained earnings may increase or decrease due to changes in asset value on the balance sheet. Basically, the operating results from a company's fiscal year is recorded to retained earnings, resulting in a increase or decrease to the account. If you think of your balance sheet, retained earnings are recorded under shareholders’ equity.

May become Retained Earnings PROFITS May become Retained Earnings A Regular C Corporation can accumulate up to $250,000 A Personal Service Corporation taxed as a C Corporation can accumulate up to $150,000 A Retained Earnings Limit has been set by the IRS for C Corporations and Personal Service Corporations. The C Corp can accumulate up to $250,000 and the Personal Service Corporation can accumulate up to $150,000. Any amount above these limits becomes “Excess Retained Earnings” and is subject to additional tax on top of the graduated corporate tax. This does not impact S Corporations, Partnerships or LLCs taxed as a Partnership. Amounts in excess must be for reasonable business needs

Excess Retained Earnings PROFITS Excess Retained Earnings Accumulated Earnings Tax Dividend Treatment Amounts in excess of the defined Retained Earnings amount may be subject to an Accumulated Earnings Tax of 15% or 20% , subject to the exceptions for the reasonable needs of the business. If you decide to distribute the retained earnings, they will be subject to dividend treatment.

Excess Retained Earnings – Does this concern you? NEXT STEPS Does this concern you? If so, we can further review your situation and work with you and, as appropriate, your other advisors to discuss viable solutions to this potential problem.