Accumulated Profits Tax

Surtax on earnings retained in a business to avoid the higher personal income taxes they would be subject to if paid out as dividends to the owners.

Accumulations above the specified limit, which is set fairly high to benefit small firms, must be justified by the reasonable needs of the business or be subject to the surtax. Because determining the reasonable needs of a business involves considerable judgment, companies have been known to pay excessive dividends or even to make merger decisions out of fear of the accumulated profits tax. Also called accumulated earnings tax.